by DaveN How Much Mortgage Payment Can I Afford?
Factors to Consider:
- Household Income:
- Evaluate your total income to determine affordability.
- Monthly Debts:
- Consider existing debts like car loans and student loans.
- Savings for Down Payment:
- Assess the amount of savings available for a down payment.
Comfort Level:
- As a home buyer, ensure comfort in understanding monthly mortgage payments.
- Unforeseen Expenses:
- Be mindful of unexpected expenses that can impact savings.
Affordability Rule of Thumb:
- Maintain three months’ worth of payments, including housing and other debts, in reserve.
Debt-to-Income Ratio and Affordability:
Importance of DTI Ratio:
- Definition:
- Compares total monthly debts to monthly pre-tax income.
- Calculation:
- Generally, housing expenses shouldn’t exceed 28% of monthly income.
Example Calculation:
- If monthly mortgage payment is $1,260, with a monthly income of $4,500:
- DTI = 28% (1260 / 4500 = 0.28).
Housing Budget Calculation:
- Reverse the process to determine your housing budget using a 28% DTI.
Affordability with Different Loans:
Conventional Loan:
- Assumption:
- Assumes at least a 20% down payment for a conventional loan.
- Conventional loans can come with down payments as low as 3% although qualifying is a bit tougher than with FHA loans.
FHA Loan:
- Consideration:
- For smaller down payments (min. 3.5%), explore FHA loans.
- Relaxed Qualifying Standards:
- FHA loans may have more relaxed standards, beneficial for lower credit scores.
VA Loan:
- Military Connection:
- Qualify for a VA loan with no down payment requirement.
The 28/36 Rule - Home Affordability Guideline:
Definition:
- 28/36 Rule:
- States not to spend more than 28% of gross monthly income on home-related costs.
- Total debts, including mortgage, should not exceed 36% of monthly income.
Example:
- If earning $5,500 monthly with $500 in existing debt payments:
- Monthly mortgage payment shouldn’t exceed $1,480.
Considerations:
- The 28/36 rule is a broadly accepted starting point for determining home affordability, but you’ll still want to take your entire financial situation into account when considering how much house you can afford.
Determining "How Much House Can I Afford?"
Monthly Income:
- Regular earnings, such as salary or investment income, set the baseline for monthly affordability.
Cash Reserves:
- The amount of funds available for a down payment and covering closing costs, sourced from savings, investments, or other means.
Debt and Expenses:
- Monthly obligations, including credit cards, car payments, student loans, groceries, utilities, insurance, etc.
Credit Profile:
- Credit score and existing debt influence a lender’s perception of your borrowing capability, impacting the loan amount and mortgage interest rate.
Use A Home Affordability Calculator:
A home affordability calculator considers all monthly obligations to provide a suitable price range based on user input. It assesses whether a home is financially within reach, emphasizing present outstanding debts in lender evaluations.
- Scenario Exploration:
- Users can alter information to simulate various scenarios and reflect their current financial situation.
- Expense and Savings Impact:
- Home Affordability Calculator helps users understand the effect of taking on a mortgage debt on expenses and savings.
Determining Affordability Based on Salary:
Use a mortgage income calculator to evaluate different scenarios based on your income:
Inputs:
- Home price, expected down payment, and assumed mortgage rate.
Outputs:
- Monthly or annual income needed and potential lender qualification.
Scenario Examples:
- What salary is required to buy a $300,000 or $400,000 house?
Role of Mortgage Rate in Affordability:
Lender Considerations:
- Lenders evaluate mortgage-worthiness based on factors like debt-to-income ratio, bill payment history, steady income proof, and available down payment.
Mortgage Rate Impact:
- Credit score significantly influences the mortgage rate, affecting monthly payments.
Affordability Connection:
- Lower interest rates result in lower monthly payments, enhancing overall affordability.
In summary, determining how much house one can afford involves a comprehensive assessment of income, cash reserves, debts, credit profile, and the crucial influence of the mortgage interest rate.