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Securing financing or a mortgage for your new home doesn’t have to be overly complicated. In fact, if you have a good indication of how much you should spend and what you can afford, then you can navigate the mortgage and home buying process with ease.
When people are looking for a home, this is an exciting process. There is always something fun about looking at potential homes and envisioning a future there. That said, purchasing a home is a big decision—one that can feel overwhelming if you are not adequately prepared.
One of the easiest ways to be ready for the mortgage process and buying a home is to figure out how much of your income you should spend on your future home loan. Thus, in order to help you do just that, here we’ll go over how much income most buyers spend on a mortgage, along with what factors you should consider when calculating your future housing budget.
In general, most experts agree that your housing budget should encompass not only your mortgage payment but also property taxes and all housing-related insurance—homeowner’s insurance and PMI (if applicable). To get a more accurate picture of how much to spend, there are two percentage-based rules that you may want to delve a little deeper into—the front-end ratio and your back-end ratio. Note, these particular rules give you a better idea of what percentage your housing budget should be, as everyone’s overall financial situation is different.
The 28 percent rule (your front-end ratio) strongly suggests that people should avoid spending any more than 28 percent of their pre-tax or gross income on their monthly housing payments. This includes not only the mortgage but also any potential homeowners association fees, real estate taxes, and home insurance payments.
On the other hand, the back-end ratio or the other rule that homebuyers are going to hear about most is the 43 percent rule. This is a rule that pertains to all debt. Therefore, this rule includes not only the monthly mortgage payments but also any car payments, credit card payments, utilities, and student loans. Here, this rule suggests that no more than 43 percent of one’s pre-tax income should go towards debt. Since this encompasses all debt, this rule may not be as helpful. But it is still one percentage you may hear when starting the homebuying process. Of course, for those looking for a more simplified way to figure out their percentage, the general rule of thumb that you can afford a mortgage that is 2 to 2.5 times your gross income should help to simplify things.
In addition to your income, you should also consider other factors like your credit score, how much of a down payment you are planning on making, your lender’s criteria, along with other important pre-mortgage considerations (expenses, your lifestyle, home-related costs beyond the mortgage, etc.). Clearly, all of these things matter and, thus, going over them will help you understand your possible future mortgage payments as well as how homeownership will impact your total budget.
But be that as it may, when you obtain a mortgage pre-approval, most lenders will approve you for a loan amount that falls in line with the general rule of thumb briefly mentioned above. Nevertheless, not all lenders or mortgage companies are alike. So, make sure that you do your research, shop around, and take the time to do the math yourself so that you know how to budget moving forward; because at the end of the day, what one lending institution approves you for, and what you may be able to actually afford could very well be two different things.
Overall, as you shop for a lender, keep in mind that every dollar counts. Remember, you are committing to a monthly mortgage payment based on the rate you choose at the very start. Even small savings on your interest rate will add up over time, so aim to work with a lender that can help you save and find the best mortgage for your specific needs or finances.
Ultimately, the homebuying process is an exciting time. But the reality is that it is important to take a hard look at the financial side of things in order to find the right home. Moreover, when potential homeowners understand what their budget is, the entire process becomes easier. Therefore, everyone needs to think about how big of a monthly mortgage payment they can realistically afford. This will help them make the right decision.
Do you have questions about home loans? Are you ready to apply for a mortgage to buy a home? If so, Sammamish Mortgage can help. We are a local mortgage company from Bellevue, Washington, serving the entire state, as well as Oregon, Idaho, and Colorado. We offer many mortgage programs to buyers all over the Pacific Northwest and have been doing so since 1992. Contact us today with any questions you have about mortgages.
What happens if you go through a tough financial period and you find yourself behind on your mortgage payments for your home?
A late or missed mortgage payment can affect your credit score. But you can get ahead of the problem by being proactive, utilizing payment reminder tools, and speaking with your lender.