How much mortgage can you afford based on your salary, income and assets?

How much mortgage can you afford based on your salary, income and assets?

How much mortgage can you afford based on your salary, income and assets?

'For Sale' sign for house (focus on sign)
Before you take out a mortgage on your new home, make sure you have the numbers lined up.

/ Getty Images

It’s easy to get swept up in the excitement of the potential to buy a home – but before you can even start your search, you need to determine your home buying budget.

How much can you pay monthly for your mortgage? And what price does that payment correspond to? These are essential questions you need to answer.

Understanding these numbers can help you set realistic, manageable expectations and keep your home search on track. Here’s how to determine them.

What can you afford?

For starters, you need a good understanding of your finances, especially the total income you bring in each month and the monthly payments for any debts (student loans, car loans, etc.).

In general, no more than 25% to 28% of your monthly income should go toward your mortgage payment, according to Freddie Mac. You can plug these numbers (plus your estimated down payment) into a mortgage affordability calculator to break down the monthly payment you can afford and your desired home price.

Please note that this is only a rough estimate. You also need to consider the consistency of your income. If your income fluctuates or is unpredictable, you may want to aim for a lower monthly payment to relieve some financial pressure.

The mortgage you can afford vs what you qualify for

While the steps above can give you a good idea of ​​what you can afford, the number you come up with may not match what a mortgage lender qualifies for when you sign up.

Mortgage lenders base your loan amount and monthly payment on several factors, including:

  • Creditworthiness: Your credit score has a big influence on your interest rate, which plays a big part in your monthly payment and the cost of long-term loans. Higher credit scores usually mean: lower interest rates (and lower monthly payments). The lowest rates are usually reserved for borrowers with 740 scores or higher, data from Fannie Mae shows.
  • Debt Income Ratio: Mortgage lenders also look at your debt-to-income ratio, or DTI, which shows how much of your monthly income your debts take up. The lower your DTI, the greater the payment you can afford. Fannie Mae says lenders typically want your total debt — including your proposed mortgage payment — to be no more than 36% of your wages (although in some cases you qualify with a DTI of up to 50%).
  • Your assets and savings: The amount of savings you have in the bank and any IRAs401(k)s, stocks, bonds and other investments also affect your loan. Having more of these liquid assets reduces your risk and can affect how much a lender is willing to lend you.
  • Loan term: Longer term loans come with smaller monthly payments because they spread the balance over a longer period of time. For example, a $300,000 mortgage (with a 10% down payment) at the current average 30-year rate of 5.23% would cost about $1,487 per month for a 30-year loan. Meanwhile, the same $300,000 over a 15-year term would cost $2,048 — nearly $600 more per month (based on the average 15-year interest rate of 4.38%).
  • Loan type: The type of loan you take out is also important. For example, FHA loans have maximum loan limits that you cannot exceed. This year, the FHA’s national loan limit is $420,680, the U.S. Department of Housing and Urban Development reports. Conventional loans go higher (up to $647,200 in most markets), while jumbo mortgage loans offer even greater limits.
  • Rate Type: Whether you opt for a loan with a fixed or variable interest rate also plays a role. Adjustable-rate loans typically have lower interest rates at the start of the loan, but increase over time. Fixed-rate loans start with a higher interest rate, but remain consistent throughout the term.

When you apply for a mortgage loan, your lender will provide you with a loan estimate that specifies your loan amount, interest rate, monthly payment, and total loan cost. Loan offers can vary widely from lender to lender, so you’ll want quotes from a few different companies to make sure you get the best deal.

What other costs can be added to a mortgage payment?

While principal and interest make up the bulk of your monthly mortgage payment, other costs can increase the total payment amount.

  • Private Mortgage Insurance (PMI) If your down payment is less than 20% of the home’s purchase price, your conventional mortgage lender may ask you to take out private mortgage insurance — a type of insurance policy that helps secure the lender if a homeowner stops paying their monthly payments. house payments. While you can usually have it removed once you hit 20% equity, initially it will increase your mortgage payments.

  • Property Tax: It is common to bundle your property taxes with your monthly mortgage payments. Those payments usually go into an escrow account and are automatically released when the bill is due. Even if your property taxes are not bundled, they are still new charges that you must pay monthly.

How do you qualify for a larger mortgage?

If you don’t qualify for the mortgage you need to buy your ideal home, there are ways to increase what you qualify for.

To get started, work on improving your credit score. If you qualify for a lower rate, you can buy in a higher price range.

For example, suppose the maximum mortgage payment you can afford is $1,500. At a 5% rate, that would give you a home buying budget of about $280,000. If you could qualify for a 3% rate instead, you would get a loan of $356,000 – nearly $70,000 more.

You can also increase your income – either by taking a side job or putting in extra hours at work. Reducing your debt also puts you in a better position to get a larger loan. The more income you can free up each month, the more the lender will want to lend you.