When buying a home, it’s essential to know how much you can afford, not just for when it comes to buying the property itself, but also how much mortgage you can afford as well. When talking about mortgages, there are various essential items that you need to factor in, like monthly debts, household income, and how many savings you’ve done for a potential down payment. Before purchasing a home, you don’t want to be stressed out when knowing your monthly mortgage payments.
If you want to know how to determine how much house you can afford, then you’ve come to the right place. Apart from the fact that you need to ensure your household income and regular monthly debts are relatively stable, you need to keep your heads up for any arbitrary expenses and unnecessary spending that could severely impact your savings. And in this article, we’re going to cover all that you need to do and more.
Figuring Out How Much You Can Afford for a House
1. The 28/36 Rule
One of the ways in figuring out how to determine what mortgage you can afford, which is what lenders might use on their end, is the 28/36 rule. According to this rule, a homeowner’s mortgage payment (including homeowners insurance and property taxes) shouldn’t be higher than 28% of one’s pre-tax income, and that a total homeowners debt (including mortgage as well as debts including student or a car loan payments) shouldn’t be higher than the pre-tax income by 36%.
Even though most lenders mainly use these numbers as a guide, these are a handful of some of the cases where you might get a higher credit score. For instance, some lenders allow borrowers who have a high credit score higher DTI ratios. And some mortgage loans allow higher DTIs, like FHA Loans, which can be 43% or more in certain cases.
2. Get Pre-approved for a Mortgage Loan
Getting pre-approved for a mortgage loan is another way of knowing how to determine what house you can afford. But when you get a mortgage, you must know the differences in getting pre-approved and pre-qualified. When it comes to getting prequalified, a lender will quickly look into your monthly income, assets, and your down payment. Getting pre-approved for a mortgage, on the other hand, requires a bit more work.
Lenders will assess your financial situation and see whether it is accurate before submitting your loan for a process known as preliminary underwriting. Preliminary underwriting is another requirement in the pre-approval process in letting lenders know how much money you can borrow.
Sure it may take some time before you get pre-approved, but the results are worth it. With a pre-approval letter, sellers will be convinced that you are a serious client and would most likely sell their house faster to you than those who haven’t been pre-approved yet.
However, be warned that the mortgage lender might attach a bigger mortgage rate than what you can afford. That’s why you should stick to your own comfortable rate rather than the one set out by your lender.
3. What is Your Credit Score?
You need to estimate your credit score and write it down. Inquire about your credit report at one of the three big agencies: Experian, Equifax, or TransUnion. You can get a single copy for each agency annually by going to annualcreditreport.com. Review the report carefully and be wary of any inaccurate information or negative marks.
If you are to find any mistakes in the report, please let the credit reporting agency know about it immediately. If you’re going to prove the claims as wrong, you’ll need to provide payment history or some other similar evidence. If you think it’s related to identity theft, then register a fraud report with the local police department.
If you’re looking for a house in Toronto or GTA, check Paradise Developments if you got pre-approved for a mortgage loan and search for a property already.
4. Calculate New Property Expenses
You’ll be offered a loan by the bank based on the total amount of payments per month that they believe you will be able to afford. But when doing this, the bank isn’t taking into account the new expenses that are going to be included in your new house. This is the case when you buy a house that requires some repair or maintenance, which sometimes can be substantial. So we would suggest that you take one good look inside your potential new home to see if there’s anything that needs fixing, including yard maintenance, utilities, HOA, and more.
5. Debt-to-income Ratio
Another way to know what house you can afford is the DTI ratio – comparing total monthly debts (like your property and insurance tax payments) with your monthly pre-tax income. Those with high debt relative to their monthly income will have a bigger DTI and vice versa. This is a significant number as it lets borrowers no one’s bandwidth to acquire more debt.
You could be qualified at a bigger ratio depending on your credit score, but the housing expenses usually don’t go above 28% of one’s monthly income. The bigger the DTI, the tougher it will be to get a mortgage or even a good interest rate. Most lenders wouldn’t even entertain a borrower with a DTI over 43%.
That’s why it’s important to pay off as much ongoing debt you have accumulated to qualify for a mortgage as well as be able to pay for a mortgage payment.