What You Should Know About Mortgage Affordability
Monthly affordability and your new home.
Can you afford a new home? What is a reasonable monthly payment for your mortgage, taxes, homeowners insurance and association fees? Will you get stuck with a home that you can’t afford?
These questions are important to ask especially given the recent history of mismanaged lending and irresponsible borrowing. True, lending standards have tightened considerably in recent years, thus the chances you’ll be approved for a home that you cannot afford are much smaller these days then they were in 2007 and earlier years.
Still, even with an approval, you need to know what you can afford and to build in some margins. Without a buffer, you could be hit with a budget busting repair bill or a financially challenging utility bill that just might make paying your next payment a real challenge.
Debt to Income Ratio
When determining how much how you can afford, lenders will look at your debt to income ratio. Generally, that amount is calculated at 31 percent of your total monthly gross income. For example, if you make $5,000 per month, then your total monthly debt payments cannot exceed $1,550. This amount includes an outstanding auto loan and student loans in addition to credit card debt. If the total of your debt before a mortgage is $450, then you’ll be eligible to make payments for up to $1,100. Some lenders, however, allow for a higher ratio of 35 percent notes the Utah Department of Financial Institutions. Remember, the higher the ratio, the riskier it is for the lender and for you.
The total monthly house payment you make each month is your PITI — principal, interest, taxes and insurance. Add in your homeowner’s association fees, if applicable. Your PITI will represent what you pay each month to the mortgage company.
What You Can Afford
Just because you can afford a $450,000 home doesn’t mean you should get one. The days of buying the most home for the money are over. Instead, find a home that matches what you want, using a monthly affordability calculator to determine the amount you want to pay per month, the number of months to repay and your estimated lending rate.
You now have much more information on hand then you did when you first began to shop for a loan. Calculate carefully and you’ll have a good idea what you can afford and what you should buy in a new home.