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What Mortgage Can I Afford

    While DTI and your home equity ratio are big factors when qualifying for a mortgage, there are a few other things that affect how much your mortgage payments will cost each month, and what you will be able to afford. Mortgage lenders also look at your personal financial situation, including how the monthly mortgage payments would add up to your total debt, and how much income you are expected to earn as you are paying off your home. Two criteria mortgage lenders look at to figure out how much you can afford are your housing expense ratio, known as your front-end ratio, and your overall debt-to-income ratio, known as your back-end ratio. How much house you can afford is also dependent on what interest rate you receive, since a lower interest rate could dramatically reduce your monthly mortgage payments.

    If you can afford a 15-year mortgage instead of a 30-year mortgage, your monthly payments would be higher, but your total costs would be dramatically less, since you would not pay nearly as much interest. A shorter-term mortgage has higher monthly payments, but it is probably cheaper over the life of your loan.

    A larger down payment may mean better interest rates, as lenders assume less risk giving you less money and making sure that you have a greater amount of equity in your home. In the U.S., a 20% down payment is the ideal home purchase, but people usually put down 5% to 20% depending on their loan. For example, if a potential homebuyer could afford to make a 10% down payment on a $100,000 house, that would be $10,000 down, meaning that homeowner would have to finance 90,000.

    While some homebuyers may be eligible to make a small down payment or zero down payment, either via VA loans or another 0% down payment program, most homeowners who do not make enough of a down payment must cover additional costs with mortgage insurance. If you put down at least 20% of your homes value, you might not need to take out private mortgage insurance, which protects lenders in case you go into default, and costs hundreds every month. Depending on your properties location, type of structure, and the loan amount, you might also have to pay additional monthly or yearly expenses, like mortgage insurance, flood insurance, or homeowners association fees.

    Your monthly mortgage payment, which covers the principal, interest, taxes, and insurance on the house, as well as all of your other bills, like auto loans, utilities, and credit cards, should not be more than 43% of your annual gross income. Add up your total monthly debt obligations, then divide that by your gross monthly income, or what you take home before taxes and deducting expenses. To figure out your max monthly debt by that ratio, multiply your gross income by 0.43 and divide it by 12.

    This will give you the overall debt-to-income ratio, which breaks down how much of your total income should be used for paying off debt, including mortgage, credit cards, auto loans, medical expenses, child support, alimony, and other obligations. The debt-to-income ratio, or DTI, compares the amount of money you owe versus the amount of money you make, in particular, the amount you owe each month relative to the amount of pre-tax family income each month. One of the influencing factors that determines the amount of money you are allowed to borrow for your home loan is your debt-to-income ratio (DTI). The front-end ratio is the percent of your annual gross income that you are allowed to devote each month to paying off a mortgage.

    You do not have nearly as much money available to pay the mortgage as someone making the same amount with no debt. It is important to be realistic about your monthly income and expected expenses so that you do not end up with a mortgage loan that you cannot repay over the long term. The last thing you want to do is go for a 30-year mortgage that is just too expensive for your budget, even if you are able to find a lender who will underwrite the mortgage. You do not want to end up with a mortgage that you cannot afford, so it is important to be realistic about your monthly income and expected expenses, and leave a little cushion in your budget for emergencies or unexpected expenses that may come up.

    If you are housing-poor when you make that first mortgage payment, you may be in a tough spot if your finances do not improve when the home needs major repairs. Whether you are or are not house poor is mostly a personal choice; getting approved for a mortgage does not mean that you will be able to afford the payments.

    You can avoid paying PMI by buying a less expensive house, or just waiting until you are able to afford a minimum 20% down payment. Some loans do not require PMI for down payments of less than 20%, so it is important to research and compare your options.

    Your housing budget will be determined partly by the length of your mortgage, so besides doing a thorough math on your existing expenses, it is important to have a solid understanding of the length of your loan, and to shop around with multiple lenders to find the best deal. You can calculate your affordability either by looking at your annual income, monthly debt, and your down payment, or your projected monthly payments and your down payment.

    The 31/43 affordability rule means that your monthly payments should not exceed 31% of your pre-tax income, and your monthly debts should not exceed 43% of your pre-tax income. If you bought a $200,000 home on a 3.90 percent, 15-year fixed-rate mortgage, you would have a $1,469.37 monthly payment (not including taxes and insurance). Your total monthly debt payments (student loans, credit cards, car notes, etc) plus expected mortgage payments, homeowners insurance, and property taxes should never add up to more than 36% of your total income (i.e.

    You can adjust the length of the mortgage (in months) under the “Affordability Calculator Advanced” option. Unless buyers are applying for VA loans or the mortgage programs with zero percent down payments, they must put a down payment towards the purchase of the house. FHA loans require you to pay a mortgage insurance premium upfront as part of closing costs, and a monthly mortgage insurance premium that is included in your mortgage payments — both can affect your affordability.

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