Taking out a mortgage is one of the most popular ways people become homeowners. Before selecting the property you want to buy, it’s important to do some calculations, even if it’s an approximation of the real home value, to determine the overall budget for the home you may have in mind. Although, the capital at hand isn’t exempted from the calculations.
When thinking of how much mortgage you can afford, two fundamental elements affect the type of mortgage you can afford: income and age. Some other determining factors include loans, the support of a guarantor, and the possession of other assets.
The applicant’s income is the first element taken into consideration by a bank when evaluating a mortgage application. Usually, the expected monthly payment does not exceed 30/35% of the salary. The total amount requested annually is approximately one-third of the borrower’s net annual income, where the net monthly paycheck is multiplied by the number of monthly payments received.
Age is another fundamental discriminant: in particular, the bank’s maximum length is willing to grant for the loan depends on it. It is difficult for those over 35 to be approved a mortgage with a maturity of 35 or 40 years for obvious reasons. And the amount of the loan itself may depend, even significantly, on the length of the loan.
Other Factors That Affect Your Affordability
Another important factor that comes into play when a loan is disbursed is the presence, at the applicant’s expense, of other debts or loans. These affect the bank’s overall assessment of the aspiring borrower’s ability to repay the credit. Believe it or not, the interest rate you receive can make a big difference in how much you can pay for the home because a lower interest rate can drastically reduce your monthly payment. To see how much your mortgage actually will cost you can use a mortgage calculator from your bank. Try also calculators form other banks, that will help you to get an overview over different interest rates banks are offering.
What makes the difference significantly can be the presence of a guarantor, a subject willing to undertake to make up for any insolvency on the part of the creditor. However, a guarantor’s signature is usually useful in obtaining the loan but does not significantly determine the loan amount you can get.
Your savings goals spending habits also play vital roles in your affordability. So, it’s best to keep them in mind when budgeting for a home.
The 28/36 Rule for Affordability
A rule that lenders can use to assess the value of the mortgage you are entitled to is the 28/36 rule. This rule says that the mortgage payment (which includes property taxes and home insurance) should not exceed 28% of your pre-tax income, and total debt (including your mortgage and other debts, such as mortgage payments, car, or student loan) must not exceed 36% of your pre-tax revenue. Although these numbers are used as a guide by many lenders, there are some cases where you can get a higher amount. For example, some lenders may allow individuals with a higher credit score to have slightly higher DTI rates. And some loans allow for higher DTIs, like FHA loans, which in some cases allow up to 43% or more.