Summary: Taking out a mortgage is one best way to afford your dream home. However, you should understand how much you can afford to borrow before finalizing.
Looking at homes is always the fun part of buying a home. But there are a lot of things you need to do before that. One of the important things to do is to get an idea of how much you can afford to borrow. Not only will it save you time, it will also help you look for houses in the right price range.
Many mortgage lenders who come to you through mortgage leads may tell you how much you can borrow. However, doing your own evaluation of the amount you can afford to borrow is always beneficial if you want a clear picture.
There are three things you need to focus on while finding out how much you can afford to borrow for a home:
- Your gross monthly income
- your long-term debts
- The amount that you can accumulate to pay up for the down payment and closing costs
Ideally your housing expenses should not be more than 25 to 28 percent of your gross monthly income. Apart from your monthly mortgage payments, these housing expenses include the payments towards your property taxes and homeowner’s insurance. While taking into account your monthly income, you should consider the following things apart from your steady employment salary:
- Any commissions and overtime bonuses (take an average of about one to two years)
- Social security or veteran’s benefits and retirement
- Child support money, Alimony, or income from any of the public assistance programs
- Rental income (after deducting debt payments and expenses), Interest and dividend income
- Workman’s Compensation or permanent disability payments if any
- net income from self-employment
- Income from any professional corporations, trusts or partnerships
Apart from your monthly income, your debts and obligations are things that lenders take into consideration while deciding on the amount that can be lent to you. These debts and obligations include installment loans, real estate loans, alimony and child support, and revolving accounts that extend for more than ten months into the future. Your long term debts added to your housing expenses should not exceed 36 percent of your gross monthly income. One of the best things you can do is to pay off as many debts as you can, before applying for a mortgage. This will not only increase your chances of getting a lower interest rate, it will also make you eligible to borrow more.
Down Payment and closing costs
The more the down payment you can make the better will be the interest rate you can get. Lenders who come to you through reverse mortgage live transfer leads will usually expect you to pay up about 20 percent of the asking price as down payment, apart from the closing costs, which will amount to about 3 to 6 percent of your loan amount.
While accumulating money for a down payment consider sources such as savings, mutual funds, individual retirement accounts, employee savings plans, and stocks and bonds. If you can’t afford to make 20 percent down payment, try getting a private mortgage insurance. This will help you borrow money against a down payment that is as low as 5 percent. Alternatively you can also try applying for an FHA loan, a VA loan, or an RHS program. While RHS and VA loans don’t require any down payment, FHA loans are available at as low as 3 percent down payment.
Before finalizing on the mortgage lenders who might contact you, it is always better to explore your options and find out where you can get more money from. If conventional mortgag
is your best option, make sure you compare the rates and terms of a few lenders before deciding on one.
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