Deciding how much to spend on a home is a very personal decision. From a mortgage perspective, you will qualify to borrow up to a maximum amount. But from a personal perspective, borrowing the maximum amount may not be the best decision.
From a lender’s perspective, loan eligibility is based on many factors. One common rule of thumb is that your monthly mortgage payment should not exceed 28% of your gross income.
So, let’s say a person has an annual gross income of $60,000. This means he could be approved for a maximum mortgage payment of up to $16,800 a year, which equates to $1,400 a month and includes principal, interest, taxes, insurance, and sometimes PMI.
Compare Your Monthly Payment to Net Income
Though we explored just one mortgage eligibility factor in the example above, each borrower should question whether borrowing the maximum amount is best for them. To do this, consider the monthly mortgage payment in light of your monthly “take home” pay.
A homeowner with a gross pay of $60,000 who brings home $3,600 per month could be hard pressed to live comfortably paying $1,400 a month on a mortgage after paying for daycare, food, a car, and more.
Analyze Your Debt-To-Income Ratio
Another factor a lender will use in determining mortgage eligibility is your debt-to-income ratio, because it’s a good indicator of your ability to repay the loan.
There are two ratios that the lender considers. The front-end ratio only takes into account the expenses related to housing. And the back-end ratio considers all monthly obligations.
Carefully analyze the ratios and make sure nothing is missing from a personal perspective. Make sure you include utilities, insurances, and recreation in your personal calculations.
Tips To Determine How Much You Can Afford
If you are thinking about buying or refinancing a home, you’ll need to know how much you can afford to pay for a monthly mortgage. So here are 4 tips to help you determine how much you can comfortably pay every month.
- Prepare a Reasonable Monthly Budget: Don’t forget to include all expenses (mortgage, insurances, healthcare, savings, vehicle maintenance, repairs, gifts, school supplies and fees, etc.).
- Estimate Your Down Payment if Buying a Home: The amount you invest in a down payment significantly affects your mortgage. The higher the down payment, the less you will need to borrow.
- Consult a Mortgage Broker: When you get close to looking for a home or refinancing, the first thing you want to do is contact a mortgage broker and prequalify.
- Stay Abreast of Changing Interest Rates: Small changes in mortgage interest rates significantly impact your monthly mortgage payment.
[Read More: 4 Tips to Determine How Much Mortgage You Can Afford]
Most of us don’t want to spend so much on a home that we can’t do anything else in life but make a mortgage payment. So, deciding how much to spend on a home is a very important life decision.
When you start the process of deciding how much to spend on a home, we would be honored to help you work through the numbers so that you can make an informed decision.