If you're on the market to buy a new house and need a mortgage, be reasonable about what you can afford. Don't make the mistake of getting starry eyed watching reality shows where cast members have huge McMansions or assume that just because your friend managed to get a big house, you can too. Look only at your own specific financial situation to determine how much you should borrow for a mortgage.
In order to determine how much you can afford to borrow for a mortgage, you have to analyze your financial situation. Lenders typically require that your yearly housing expense does not exceed 28 percent of your annual income. For instance, If you and your spouse make $75,000 per year combined, you can afford to spend no more than $21,000 per year on the mortgage. Monthly payments in this case work out to about $1,750. Knowing this, you can use an online mortgage calculator to determine a total mortgage amount based on those monthly payments. It's also important to consider your other debts when determining how much you can afford — lenders want a total debt-to-income ratio (debt payments divided by gross monthly income) of 36 percent or less.
When determining how much to borrow, remember to factor in your down payment. The requirements vary by lender, but in most cases, you need a 20 percent down payment in order to get a traditional loan. By knowing your down payment total, a lender could decide how much you can afford to borrow. For instance, a $20,000 down payment would get you an $80,000 mortgage for a $100,000 home.
Real Estate and Insurance
The principal and interest payments on a mortgage loan aren't the only housing costs you need to consider when buying a home. You must also pay property taxes and insurance each year. Sometimes the lender requires you to build this cost into your monthly mortgage payment each month. So when determining how much you should borrow and the payment you can afford, keep these necessary costs in mind.
Be Comfortable With Your Decision
Just because a lender says that you can afford a $1,750 per month mortgage payment doesn't mean that's what you should take on. Consider your goals for the future when deciding how much you should borrow to buy a home. You may decide to take on a much lower mortgage in order to put more money towards retirement or to pay off other debts.
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- What Is Included in the Debt-to-Income Ratio When Doing Home Mortgages?
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