If you are in the market for a mortgage, you probably wonder how much you can afford. How much of your monthly income should you dedicate to your mortgage? While every lender and every loan program will have a different answer, there is a general rule of thumb or target you can use to get the most out of your mortgage.
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The key factor here is that you take a
loan that you can afford. You don’t need to take the full amount that a lender offers. When you go get a pre-qualification or pre-approval from a lender, they usually qualify you for the ‘most’ mortgage that you can afford. This doesn’t mean you have to take that amount, though. You are free to take a loan amount that is much less in order to make sure you can comfortably afford the loan.
The 28% Rule
We talked about a rule of thumb or target that you should strive to achieve when deciding how much mortgage you can afford. The rule we like to use is the 28% rule. This is the rule that conventional loans follow and is the one that works when borrowers don’t know how much mortgage they can afford.
The 28% rule means that your mortgage payment shouldn’t exceed more than 28% of your gross monthly income. For example, if you make $5,000 per month, your mortgage payment shouldn’t exceed $1,400. This includes principal, interest, real estate taxes, and insurance.
If you use this as your target, you’ll avoid overtaxing yourself with a mortgage payment that may be hard to afford on a regular basis.
This isn’t to say that you have to cap yourself at the 28% rule. You can have a little give and tack in the process. For example, FHA loans allow you to have a
housing ratio of up to 31% of your gross monthly income. That gives you a little more leeway, which can be helpful if you have lower income and find that the mortgage you qualify to receive is on the low end.
Figure it Out in Real Life
Now that you know the 28% rule, it’s a good idea to see how this would work in ‘real life.’ In other words, take the potential mortgage payment including the real estate taxes and insurance (divided up monthly) and plug them into your budget. Can you see yourself affording the payment as it is? Do you find yourself struggling at any point during the month? Is the payment too much to handle?
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Once you put the amount in your paper budget, practice actually paying that amount. Take the exact amount of the mortgage payment out of your checking account and put it somewhere else. You don’t have to spend it, but take it out of your checking account so that it’s not a part of the available balance. Now see how things go the rest of the month. Can you live the life you are used to living or do you find yourself sacrificing? If you do have to sacrifice, is it making you upset or is it something you can live with because you know that you’ll own a home?
Talk to Several Lenders
We recommend that you talk with
several lenders and look at several loan programs to determine what works best for you. The 28% rule may be right on track for you. Some people may find that they have a little wiggle room and can afford slightly more than the 28%. This is often the case for borrowers that don’t have a lot of ‘other debt,’ such as credit cards, car loans, and personal loans.
By shopping around, you can find the deals that work the best for you. It may be that a conventional loan isn’t the right option, but an FHA loan with its flexible debt ratio guidelines suits your needs. You won’t know until you shop around and find the loan program that is right for you.
The one thing you should make sure when you take out a mortgage is that you can easily pay for it. You don’t want to struggle to make your housing payments each month. That becomes a burden that no one wants to deal with and it may lead to buyer’s remorse. Instead, stick the loans that you can afford and make the most out of the mortgage that you have at your hands.
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