How much of a Mortgage can you Qualify For?
Before you start shopping for a home, it’s a good idea to determine the amount you will be able to afford. In these tough economic times the last thing you want to do is find yourself in a situation where you’re overextended. In this article we’ll share a few guidelines you can follow to get a good idea of how much you will be able to qualify for. Once you have an idea of the amount of mortgage you can qualify for you’ll be able to identify the price range of homes to look at and the fun of shopping can begin.
Your Mortgage should be No More than 28% of Your PreTax Income
In order to keep your housing costs affordable, determine what your total income is. You can include all income from jobs, rental income and any seasonal or part-time income you make. Once you know your income, 28% of that is how much you can reasonably afford to spend on housing. However, that 28% needs to cover more than just the mortgage. You need to factor in other housing expenses like property taxes and insurance as well. If you’re thinking about purchasing a condo, you also need to factor in homeowners association fees.
Total Debt Must be Less than 36% of Income
This is where most folks have trouble getting qualified for the home they really want. It isn’t enough to keep housing costs under 28%, you also have to keep total debt under 36%. The first step is to determine what 36% of your income is. Next, add up all of your debt payments – car loans or leases, credit cards or student loans. Then subtract that total debt payment from the 36% of your income and what is remaining is the amount you can spend on housing payments.
How Much Down Payment do you have?
When you determine the amount of a mortgage, it is only the amount you will be borrowing. For example, if you have $40,000 to put down on a home then you can subtract that from the amount you will be borrowing. So a $250,000 home in this example will need a $210,000 mortgage. Larger down payments will also help you qualify for lower interest rates which will lower your total monthly housing expenses and allow you to purchase a more expensive home.
Keep Some Emergency Cash
It is tempting when you’re buying a new home to sink all available cash into the purchase. If you can, resist the temptation. Consider what kind of position you would be in if you were to lose your job, or if you have two incomes, if one of you were to lose their job. You want to try to move in with 2-3 months of living expenses in a rainy day account.
Buying a home is an exciting event. Now that you understand the amount that you can spend on housing you can start shopping with confidence for homes that are within your price range.