Before committing to a home mortgage be sure to calculate how much mortgage you can safely fit into your budget. Homeownership should make you feel secure and safe. This means not taking the largest mortgage that your lender will permit. As a buyer, look ahead to anticipate life event desires and how that might influence the budget. These could include going back to school and/or having a child. Factor these lifestyle issues into the budget. Remember many lenders will not understand or consider your current and future financial personal goals. Lenders base their loan approval on a formula. Following are tips that can help determine how much you can afford:
Budget detail list – An old rule that the price of your new home should not be greater than 2 to 3 times your gross income. For example, if your gross income is $100,000 then you should not purchase a house greater than $300,000. This rule is not always true because a home buyer may have other debts such as: student debt, car loan and credit cards. These debts must be subtracted to determine how large a loan a buyer can qualify for. This means the buyer has less money to pay on a mortgage loan. The best way to determine how much money you have left over is to pay the mortgage first then tally all current monthly bills plus vacations and what you desire to put into savings.
Downpayment – Greater the downpayment the lower your mortgage payment is going to be. If your downpayment is at least 20% you will not be required to pay mortgage insurance. This allows more money to be paid towards lowering your outstanding loan amount. Two other things that affect your loan payment are the interest rate and price of a house. If interest rates rise, mortgage payment will be higher.
Debt – Many lenders but not all consider your maximum debt limit should not be greater than 43% monthly income. This includes monthly mortgage which includes principal, interest, insurance and taxes, and other bills such as: car loans, utilities, and credit cards, etc. Some lenders are willing to go above 43% but be careful you are entering a danger zone. Normally most people will experience an emergency during their lifetime, and this takes additional funds.
Rent payments – If you are renting a home, use that amount as a guide to determine how much mortgage you can afford. Factor property tax deductions and insurance into your calculation. If you are struggling with your rent payment buy a house with the same payment rather than purchasing a home with higher payment. As a homeowner you will have expenses such as repairs and property taxes you will have to be paid instead the landlord paying. Finally, deduct property taxes and mortgage interest on your federal tax return to save some money.
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