This is typically the number one question mortgage professionals are asked by new clients.
Of critical importance when considering mortgage financing: There is often times a difference between what you CAN borrow and what you SHOULD borrow.
In other words, what makes for a “comfortable” long-term mortgage payment?
The Quick Answer:
If we’re simply considering the financial math, lenders will calculate your Debt-to-Income Ratio and generally allow up to 45%-50% of your gross income to be used for the new house payment and all consumer related debts combined.
Sample Mortgage Scenario:
Let’s use a gross monthly income of $5000 and a qualifying factor of 45% Debt-to-Income Ratio:
$5000 multiplied by 45% = $2,250 max monthly mortgage payment and other debts
This means that your new mortgage payment (Principal, Interest, Taxes, Hazard Insurance, Mortgage Insurance) and other consumer debt (auto, credit cards, etc.) can not be more than $2,250 per month.
Remember, that debt ratios and guidelines vary from program to program and by other factors such as the amount of down payment and credit score.
Regardless of how your personal income and credit scenarios factor in, it is important to consider your overall budget when trying to determine how much of a mortgage you should qualify for and also what you will be comfortable paying. What you will be comfortable with, may be less than what you qualify for.
Other items to consider in your monthly budget:
1. Confirm all debts are taken into account
2. Any private notes or family loans
3. Short-term expenses – medical, auto repairs, travel, emergencies
4. Plan on additional expenses for the home such as water, electric, maintenance, etc…
5. Keep a cushion for savings and financial planning.
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