Buying a home is often a long process and this is certainly true when you might have delays relating to applying for a home loan. While you might want “as much home as possible”, it’s important to remember that your credit score is there for a reason. In other words, it always serves better to be realistic with your budget and you shouldn’t want a home loan that you simply cannot afford.
In this article, we try to keep things realistic and help you get to the bottom of how much home you can really afford, while keeping an eye on the monthly payments:
How Much Home You Can Afford at a Glance
As a rule, you can calculate how much home you can afford by using the 36% calculation. This rule essentially means that your total monthly debt and projected payments, taxes etc should never exceed 28% of your gross or pretax income.
This monthly debt should include all expenses including credit card debt, student loans or car notes. It also makes sense to keep this percentage in mind, for you want to be able to afford whatever mortgage payments are coming your way.
Another way to approach your budget is to ensure that you have three months of total costs and debts in reserve. In this sense, if anything goes wrong during the loan, you will always have a fund on which you can fall back on in times of emergency.
How Lenders Will Determine Your Monthly Line of Credit
Mortgage lenders have a series of ratios which they use to determine your eligibility for a home loan. Each lender has a different set of ratios, but they are mostly within the same range. If your monthly mortgage payment does not exceed 28% of your monthly gross income, they can quickly determine how much home you can afford as follows:
– If you have an annual salary of $100,000, the mortgage payment should not exceed $2,333. This is 28% of the combined monthly income.
Another way to calculate this figure is to ensure the total housing payments including insurance, taxes and mortgage payments is not above 32% of the total gross income. And finally, lenders will sometimes use the “rule of 40” which increases this figure to 40% which makes it much harder to acquire a large line of credit for your home loan. It also means that if you have an existing loan or lots of debt, you won’t be able to afford as much for your monthly mortgage payments.
It’s true, buying a home is often delayed by the home loan process and this is certainly true when the borrower has a poor credit score. In terms of how to improve your chances of affording more home, the only way is to reduce debt and increase income. In fact, many lenders will often refuse to lend any amount of credit for a home loan until the borrower has eliminated all of their existing debt. To learn more about how much home you can afford, contact a salary-based loan officer at City Creek Mortgage today.