Purchasing a home is a major milestone in one’s life.
As exciting as it is, you want to feel confident and secure in your final decision. A great conventional mortgage with an incredible rate will help you to do so. But how can you find that and a home that you can realistically afford?
We’re going to review what impacts the affordability of a mortgage, the 28/36% rule, and most importantly—calculating “how much house can I afford?”
What impacts the affordability of a house?
Like any major purchase, it’s best to start by researching what affects affordability.
The cost of a conventional mortgage could include:
- Monthly mortgage insurance
- Your down payment
- Property taxes
- Closing costs
- Interest rate
- Any other fees that may be required based on your conventional mortgage loan
Consider all of your gross monthly income and weigh that against your debts. This can include any credit card debt, student loans, and any other large payments you make regularly.
Once you have that figure, it’ll be easier to see how much you have left over each month for a monthly mortgage payment.
Many experts recommend that your housing expenses should not exceed 30% of your monthly income.
Another thing to consider is the housing market, including home prices in your area and the federal interest rate.
For example, if you get an interest rate of 7%, and you’re looking at a 250K mortgage based on 30-year terms, then you could be paying around $1600 on your monthly mortgage.
What is the 28/36% rule?
The 28/36% rule is a method used by lenders to help them determine your overall financial stability.
Let’s break it down:
28: This ratio component upholds how much your income will go towards your conventional mortgage. The idea is that your housing expenses divided by your income should be below 28% of your total monthly income.
36%: This part of the ratio represents how much of your income goes towards paying off monthly debt. To determine this, you would divide your total monthly debt by your income, with the idea that this total would fall under 36%.
However, this isn’t the only factor that affects how much house you can afford.
Lenders will also consider other factors, including but not limited to,
- Credit score
- Your down-payment
- DTI ratio
- Financial health (any financial discrepancies or faults)
- Your income
If you’re concerned about your financial comfort while taking on a mortgage, rest easy knowing there are also ways to improve your home affordability so that you can continue to live your life comfortably.
How to improve home affordability
You can improve your financial situation in many ways, thus improving how much house you can afford based on your salary.
Let’s review some of the ways you can afford your dream home.
Make a significant downpayment
The more you can put down for a down payment, the better conventional mortgage rates you’ll be offered. Start by researching your ideal home and how much it may cost. Then you’ll get an idea of how much to save for the potential down payment.
By putting down a larger down payment, you’ll start out with more equity in your home. Lenders may assess your mortgage as less of a risk. This will also help your loan-to-value ratio, meaning your monthly mortgage will be more affordable.
Improve your credit score
You should know where you stand with your credit report, and also what determines your credit score.
Some of the main factors that determine your score include:
- Your payment history (how many missed payments or delinquencies you have)
- Your overall debt
- How long you’ve been borrowing (credit history length)
- How you’ve managed various types of loans, such as credit cards, auto loans, personal loans, student loans
- Recent credit activity and how many new accounts you have
All of this combined establishes your credit score.
If you can review your credit report and determine any weaknesses or mistakes, you can start to make improvements that will help you obtain your ideal mortgage.
Pay off debt
If you’re able to pay off any debt before you begin to look for a house, you’ll see benefits all around.
By paying off debt, you’ll be able to set aside that money towards your down payment and monthly mortgage payments.
It would also improve your credit score and your debt-to-income ratio. These are the two determining factors for lenders during the approval process for your mortgage loan.
The obvious solution to improving affordability is to increase your income. It may be difficult to do so but if there’s any way to make some extra (recordable) cash, you’ll have more wiggle room for a monthly payment.
You want to be sure that whichever you decide to do to improve your income is provable, as that will be necessary to move forward with your mortgage application.
How to calculate how much house you can afford
Calculating how much house you can afford is easy and pain-free.
It’s helpful to have all your expenses and income outlined, along with knowing how much you expect to spend on your new home and what your ideal loan terms look like.
While you can do this on your own, a calculator makes life so much easier.
With our conventional mortgage payment calculator, you simply enter your ideal loan term, the estimated home value, how much you can put down for a down payment (as a percentage), and the interest rate percentage.
You’ll be able to determine your monthly conventional mortgage payment, principal and interest costs, how much to expect with tax and insurance, and your PMI (premium mortgage insurance).
AAA Banking can help you get an affordable mortgage
Once you’ve made calculations, collected necessary documents, and have done your research, meet with an experienced lending team such as the one at AAA Banking.
We’ll review your scenario and provide mortgage options that best suit your financial needs.
Reach out to us today to learn more about how we can help you obtain your financial goals.
Photo by Lisa Fotios