Mortgage is one of the technical areas when it comes to purchasing a house. There are hundreds of questions that we come across when looking out for mortgages but the most important one is: How much I can borrow on a mortgage? This article will guide purchasers about it.
As a general point of view, the amount at which monthly loan payments equates to not more than 28% of the gross monthly income. There is some leeway given by the lender if the credit score is excellent. Moreover, total debt payments must not exceed 36% of the total monthly income.
This is taken as a guideline by most of the purchasers. Nevertheless, the amount one must borrow is not always the same that can be borrowed. Here are three basic steps that must be followed in order to figure out how much one must spend on home:
- Prepare a budget
Before determining a mortgage payment that one can afford, it is important to create a budget. Include all the short-term and long-term aspects in the budget before allocating amount to the mortgage payment. Even though possessing home means building net worth, it is a volatile asset that cannot be converted to cash. It is important to note that there must be enough short-term savings to pay for mortgage for at least 6 months in case an unfortunate event shows up.
- Account for increased expenses
Fortunately, most budgeted items do not change when purchasing a new house. For instance, the expenses related to food and clothing would remain same as they were earlier. However, some aspects such as utilities and home insurance may increase when purchasing a residence. Property taxes may also experience an increment. So when forming a budget, just plugging in the amount that current owners pay is a big mistake. Recalculate all the amounts depending on the purchase price.
- Determine mortgage payment
Once a new budget is prepared, it will become easy to figure out how much mortgage payment can be afforded. If the amount that can be afforded is less than what is needed, it may become indispensable to make adjustments in the budget items. Reduce non-essential expenses in this case such as spending less on vacations and other recreational activities. Also look up for different insurance policies in order to get a better deal.
Here were three basic steps in order to calculate how much mortgage a purchaser affords. Purchasing a house is not an easy task. There are hundreds of discussion to be made. There are many financial aspects that needs to be addressed. Furthermore, remember that cash is needed for down payment which will have an impact on the amount of your loan. Also understand the nature and details of your credit report before contacting a lender. This will help you improve impression in front of the lender, either as a low-risk or high-risk borrower. Plan each and everything in detail to get better results.