Lenders approve borrowers based on their income, monthly debt load, and estimated homeowner expenses. The result of this calculation will provide you with a number that tells you how much you can borrow, but it doesn’t necessarily tell you what you can afford. What you also need to take into consideration are monthly taxes, insurance, and interest charges on top of having adequate emergency savings.
The rule of thumb for a lender is a borrower will pay approximately 36 percent of their gross monthly income towards their overall debt – including their home; and that 28 percent of this will go directly towards their house payment.
With that general calculation, that’s 1/3 of your monthly income. Can you comfortably afford to pay 1/3 of your income towards debt each month? That something you’ll need to be honest with yourself about and be confident in sharing your concerns with your lender so they can work with you to find something you can afford.
To do a little research on your own, here are some helpful tips:
1) Crunch the numbers – In order to truly know what you can afford each month for your house payment, you need to be honest with yourself about what money comes in and what money goes out. Then after you determine your budget, make sure you also have a good savings account and an emergency savings account that you can easily access in case you need it. This honest look at your monthly budget and savings will be a good opportunity for you to really understand what you can afford each month for a house payment.
2) Give your new house payment a test run – While you’re renting or in your existing home, increase you house payment to what you expect to be in your new home by paying your rent or mortgage, and taking the extra that you’d be paying towards a new mortgage and put it into savings. Make sure after you do this, you don’t touch it. Do this for at least three – six months to see if you can afford the higher payment and that it doesn’t cut your budget too close.
3) Tweak the numbers – What if you give your new mortgage payment a test drive and you can’t afford the extra money per month it would cost you? This means it’s time for you to tweak your original calculation to a mortgage payment that is better suited to what you can afford.
4) Try it again – After you tweak your numbers, give your new mortgage payment a test drive again before you commit to making it permanent. Follow what was outlined in number 2 above before you move forward with a new home and a new mortgage payment.
If you’re ready to talk to us to better understand your mortgage options and what you can afford, CLICK HERE or give us a call at (855) 693-7283.