How Much Mortgage Can I Afford?

Published on: November 26th, 2021 | Written by Jimmy Vercellino

how much mortgage can i afford

It’s easy to get wrapped up in the excitement of buying a home, especially if it’s the home you’ve envisioned for your family to settle down in. The thought of your kids coming back to a home they’re proud home when they’re all grown up can make you feel and your partner feel good. But it is crucial to be realistic about how much mortgage you can afford.

The last thing you want to do is overextend yourself and default on a loan you never were ready to pay. Being “house poor” is not only stressful on your kids, but it can also lead to you losing your new home, starting over again at square one. We believe understanding your finances and home loan options will help you set expectations that your spouse and kids trust.

And that ends with knowing how much mortgage you can afford.

What is a Monthly Mortgage Payment?

For homebuyers, the most significant cost of homeownership is most often your monthly mortgage payment, which has two components: the principal and the interest. Your principal is the amount you pay each month that decreases your outstanding loan amount, subtracting from your borrowed total.

However, the part of the equation you probably dread is the rate you agree to pay the lender for their lending service or the interest. These can fluctuate as fast as an hourly basis, but you can enact a mortgage rate lock with a lender to guarantee a low percentage.

There can also be monthly costs for property taxes and homeowner insurance. So, before you fall in love with a house out of your financial range, it makes the most sense to determine the monthly mortgage payment you can manage.

Start by Crunching the Numbers

Before you take that dream property you saw off Zillow and put your bank account behind it, there are four things you need to look at first. You can sit down with your spouse or an experienced home lender to review your earnings, expenses, down payment, and mortgage rate. They can help you figure out the price range for the mortgage you can afford.

1). Your Earnings. We recommend beginning a budget and calculating how much you (and your partner or co-borrower) earn each month. Include all of your combined revenue streams, from investment profits to salary earnings.

The real estate agent you partner with will consider these as you’re house hunting, keeping the price in check.

2). Your Expenses. Continue your family’s budget by adding up the money you spend each month. That means tracking your student loans, credit card balances, even your dry cleaning bills, and those frequent stops for fast food.

Your expenses are a central factor in how much you can reasonably afford to spend on a house. Even if you have a large income, that means nothing if everything goes toward debt and other responsibilities.

3). Your Down Payment. Next, determine your total down payment, which represents a portion of the total purchase price. The higher your down payment, the less you’ll have to borrow and pay each month.

This means that if your family decided to save for 6 to 18 months (depending on your earnings and expenses), you could afford that dream mortgage without the fear of losing it.

4). Your Mortgage Rate. The last thing you need to review for understanding how much you can afford is your mortgage rate and loan terms. The popular choice is 30 years, but you may want to opt for a shorter loan term, especially if it is within your means.

A shorter-term loan will allow you to gain full ownership of your home and build equity quickly. And although short-term mortgages typically come with lower interest rates, they require a higher monthly payment. A lender who’s been in the home loan business for a while can weigh these options with you against your current finances.

Learn the 28/36 Percent Rule to Know What You Can Afford

Most financial advisors suggest that people should spend no more than 28 percent of their gross monthly income on housing expenses and less than 36 percent on total debt, such as car expenses and credit card payments. This 28/36 percent rule is also known as the debt to income ratio (DTI), and we believe it is an excellent guideline when purchasing your kids’ childhood home.

For example, simply multiply your monthly income by 28 to calculate how much 28 percent of your income is. If your monthly income is $6,000, your equation should look like this:

6,000 x 28 = 168,000

Now, divide that total by 100 to figure out 28% of each month’s income.

168,000 ÷ 100 = 1,680

In this sample, you should be comfortable with a monthly mortgage of no more than $1,680. The 28/36 percent rule is the tried-and-true home affordability rule that establishes a baseline for what you can afford to pay every month.

Know Your Credit Score

Researching your credit before you apply for a mortgage is a wise and necessary step. First, check your credit report at one of the big three agencies: Equifax, Experian, and TransUnion, and request a free copy of your detailed information. Take time to look over and carefully review your report. If you find errors, be sure to alert the credit reporting agency right away.

Run the Numbers with a Mortgage Calculator

Calculating your personalized mortgage is your first step toward homeownership. Once you determine your monthly income, credit score, and debt, you can put these numbers into a mortgage calculator to get a clear idea of your homebuying budget.

It’s no secret that mortgage lenders tend to give the lowest rates to borrowers with the highest credit scores, lowest debt, and sizeable down payments, although you don’t have to be perfect to get a mortgage. Determining how much mortgage you can handle requires a close look into your current and predicted future financial situation.

For instance, no one wants to think about losing their job, but having an emergency fund and safety net is smart. A good rule of thumb is to hideaway three to six months’ worth of expenses. Your emergency money can go toward paying your mortgage if needed and protecting your partner and kids, even if you did make an affordable home purchase.

Understanding the Types of Mortgage Loans

There are various home loans with benefits to help you afford the big house and spacious yard you’ve had in mind for years. While homes on the market sell for different prices and mortgage rates go up and down, the home loan you choose can make your home deal.

1). Traditional Home Loan. Conventional mortgage loans are one of many home loans you can take to help finance your home purchase if you have enough for a large down payment. Usually, you can acquire this mortgage type from a private lender such as a bank, credit union, or mortgage company by having a high credit score.

Most conventional mortgage loans have fixed rates that do not change during the life of the loan. This allows you to have a stable rate in an unpredictable world so your partner and kids have a roof over their heads no matter who’s in office.

2). FHA Loan. It’s not always easy to save up a large down payment. Federal Housing Agency (FHA) mortgages can help you get into a home with less money down and if your credit score is not as high as you had hoped.

They are a great alternative if you do not have the polished financial resume lenders require for conventional loans but are still ready to buy a home. In Arizona, an FHA loan is a flexible option that can even allow for your down payment to be a gift from a generous family member or friend.

3). VA Loan. If you are a veteran, active-duty military serviceman or woman, or a surviving spouse, the VA Loan is a solution with you and your family in mind. The Department of Veterans Affairs guarantees or promises to pay a portion of the loan if you default, so lenders are generally more lenient with their qualifications.

These loans have incredible benefits such as low-interest rates and no down payments.

4). Jumbo Loan: A Jumbo Loan could be your best option if you need a loan amount higher than $548,250 (the current loan limit in Arizona and most of the United States).

Similar to the conventional loan, you’ll need to put down a higher down payment and a credit score of at least 680. But this can be a powerful finance option to get that beach house in your name or buy that gorgeous vacation home your kids deserve.

Prequalification and Preapproval Can Help

You may also want to consider prequalification for your house search to see how much mortgage you can afford. While prequalification doesn’t give you a loan commitment or a guarantee, it’s a good first step to see the amount and type of loan a lender could offer you. You will need to supply some basic information about your finances, as well as a credit check.

Preapproval is a little different, where you will complete a mortgage application and undergo a credit check. The lender will verify the information you provide, and if you’re preapproved, you’ll receive an official letter showing you can get a loan for a specific amount. It is usually valid for a 90 day period.

Getting preapproved can give you a competitive edge, especially in a hot market. It demonstrates to sellers that you’re a serious homebuyer and can secure a mortgage. This process makes it more likely that you’ll complete your purchase of the home. And a prequalification will further inform you of the loan amounts and types you and your partner qualify for.

Hidden Costs to Consider

But beware! The purchase price of a new residence starts with the mortgage, but there are so many other financial requirements that are part of homeownership, such as closing costs, property taxes, homeowners insurance, and ongoing maintenance costs. Take all this into account to be sure you are buying a house you can afford for years to come.

Expert Loan Advice in Arizona

You’ve worked hard to save and afford to buy a home. If you are feeling overwhelmed by all this information and choices or just want some expert guidance, we would love to speak with you. We will help you secure a personalized loan to purchase the home of your dreams and give you peace that it’s something you and your partner can afford.

Whether you have just entered the housing market or found the vacation home of your dreams in Arizona, it’s easy to be intimidated by the countless loan options available. We are committed to serving you by walking alongside you toward homeownership and understanding how much mortgage you can afford. Our team knows that buying a house is an exciting adventure, and we want to share that journey with you.

Call us now at 480-800-8387 to discuss your mortgage needs and get the optimum financing solution for your home. Your family matters, and we want to give you personalized service for your home loan.

Buyer Education