HOW MUCH HOME MORTGAGE CAN I AFFORD?
How much home can I possibly afford? This is the most common questioned asked from a home buyer’s perspective and as we expected, the answer is “it depends”. The truth behind this frequently asked question is that there are no actual rules for how much home you can afford, or how big your mortgage should be and if you try to calculate it by yourself, the mortgage lenders will calculate your maximum home purchase price differently from how you projected it yourself. So, how does this really work? Well, there are two approaches to home affordability and each considers with latest mortgage rates – we’ll examine both.
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METHOD 1: THE BANK WILL DO IT FOR YOU USING DTI TO DETERMINE YOUR MAXIMUM PURCHASE PRICE
If you ask a bank to calculate your maximum home purchase price, be prepared for their answers because for sure the bank will give a very small consideration to your existing home options or any properties that you are rooting about on making an offer – they will differ surely.
The banks method usually involves the consideration of your annual income and debts rather than using a specific sales price for its calculation. The bank then calculates the maximum-sized mortgage payment which could be added without increasing your debt-to-income (DTI) above the allowable limits.
Once the bank finish calculating and finds your maximum approvable mortgage payment, they will use latest mortgage rates to “back in” the maximum allowable loan size. Thus, it clearly shows that this method is based on maximizing your debt-to-income ratio, which may not give you a desirable after effect. However, the DTI-based formula is not meant to show what you should be paying for a home, instead it gives you a clear picture on what you could pay for a home.
Moreover, there are two parts in which a bank will check your debt-to-income ratio – the front-end ratio and the back-end ratio.
DEBT-TO-INCOME: FRONT-END RATIO
The first element for the debt-to-income ratio is the “front-end ratio”. So, what is front-end ratio? Front-end ration compares the expected monthly housing payment with the buyer’s monthly income, where the “housing payment” includes but not limited to the following obligations:
- Monthly principal + interest payments
- Monthly real estate taxes due
- Monthly homeowner’s insurance due
- Monthly dues due to association
The truth is, there is no maximum limit for a front-end ratio, but lenders desire to see front-end DTI of 28% or smaller. Simply, bankers prefer the 28% or less allocation to your housing payments for your total monthly income but you can still be approved with a front-end ratio greater than 28% but it’s a little unlikely.
DEBT-TO-INCOME: BACK-END RATIO
The second element for the debt-to-income ratio is the “back-end-ratio”. The bank-end ratio simply works by comparing the monthly housing payments against a buyer’s monthly income and all other monthly payments where it accounts for the following monthly obligations a home buyer might have:
- Monthly housing payment(s)
- Monthly minimum credit card payments
- Monthly child support or alimony
- Monthly car payments for a car loan or lease
- Monthly payments to an installment loan such as a timeshare
Generally, banks want to see a standard back-end ratio of 36% or less, however, having a DTI over 36% would not automatically disqualify your loan application since many lenders allow a margin up to 45% debt-to-income.
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METHOD 2: CREATE YOUR OWN MONTHLY HOUSEHOLD BUDGET
As a home buyer you have two options in hand, either you rely on a bank to convey you on how much home you can afford or weigh things on your own on how much home purchase price you can possibly afford to spend at maximum.
In most cases, your bank will surely approve you for a more luxurious home than you want to purchase since banks used a 45% debt-to-income ratio. But the thing is, when you spend about 45% of your income monthly, you will be left empty handed afterwards – remember you need to allocate cash for saving, investing or living and paying taxes.
Thus, it’s highly recommended to consider the other approach to the question “How much home loan can I afford.” The first thing you should do is to determine the maximum monthly payment that you would like to have each moth, and then, using latest mortgage rates, do the reverse math to find your maximum mortgage loan size – example, lets assume that you have a budget of $2,500 per month on your housing payment with 2% annually going to taxes and insurance, with a current 30-year mortgage rate of 4%, if you do the math reversely, it will show a maximum home purchase price of $385,000.
This kind of method can be far more effective to keep on your budget rather than letting the bank set your price.
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GRAB THE LATEST MORTGAGE RATES
To answer the million dollar question – How much home can I afford? The ultimate things it requires to know is latest mortgage rates. Mortgage rates affects your monthly payment which in response affect your budget.
Remember that Mortgage Rate quotes are available for FREE, with no hidden obligation to continue, and with no social security number required to get started. So, Get your latest mortgage rates here!