If you’re planning to buy a new home, you need a mortgage that works with your budget.
As a general rule, most people can afford to finance a property with a price of up to two and a half times their gross income. So, if you earn, say, $100,000 per year, your mortgage ceiling would be $250,000.
However, this is just a guideline. Before you start shopping for a new home, you need to determine how much mortgage you can really afford. Here, the Intercap Lending team explains the most important factors to consider.
Mortgage Lender Criteria
Understanding how lenders will decide on the size and terms of your mortgage loan can be quite helpful.
Mortgage payments have four parts – principal, interest, taxes and insurance – which lenders often refer to collectively as PITI. For affordable home financing, most lenders aim to keep the PITI below 28 percent of your gross income.
Lenders also calculate your debt-to-income (DTI) ratio, which is the percentage of your gross income that goes toward your monthly bills. In most cases, mortgage lenders look for a DTI below 36 percent.
Credit history and credit score are also factors in the mortgage loan decision, and lenders often require a down payment of at least 20 percent of the property purchase price.
Personal Considerations
Though mortgage lenders make their calculations based on gross income, home financing experts recommend thinking in terms of net income. Allocating no more than 25 percent of your take-home pay to your home loan payment ensures that it is affordable.
In addition, you need to consider your income stability and your ability to find another position – one that pays at least the same wages — if you happen to lose your current job. And, factor in any expected future expenses, like a vehicle purchase or college tuition. By being practical and forward-thinking, making your monthly mortgage payments shouldn’t be a struggle.
Homeownership Costs
As you build a realistic picture of your financial future in your mind, think about the costs beyond the mortgage. Homeowners have many financial responsibilities, and you need to plan for the ongoing expenses in your budget.
Utilities, cable television, cell phone service – costs like these are typically unavoidable. Plus, every new home requires maintenance at some point, and there’s no predicting when a trusted appliance will need repaired or replaced. So, when you go to obtain home financing, make sure your mortgage payment allows for a cushion to cover regular and unexpected expenses.
Need help figuring out how much mortgage you can actually afford? The professional team at Intercap Lending, a trusted Utah loan provider with decades of experience, has the knowledge and expertise to answer your questions and assist you in securing affordable home financing.
Intercap Lending has helped thousands of individuals and families achieve their dreams of homeownership. Let us assist you with your plans to buy a new home – contact us for a free mortgage consultation today.