With rent prices skyrocketing, one of the most common questions any potential homebuyer has is if they can afford a mortgage (and how much). Here's what you need to know about mortgage affordability.
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What Lenders Recommend
Meeting with a lender for a pre-approval should always be the first step in homebuying, because they can provide an accurate picture of mortgage affordability and give you a price range to shop within.
Most lenders recommend that your mortgage payment, including principal, interest, taxes and insurance (known as PITI), be less than 28 percent of your gross monthly income. Lenders will also analyze your debt-to-income ratio, which includes monthly obligations, such as credit card payments, student loans, car loans, alimony, child support, along with your PITI. Lenders ideally want this ratio to be at or below 36 percent off your gross monthly income.
What Factors Affect Your Mortgage Affordability
Income and monthly obligations are obvious factors that affect your mortgage affordability, but these other factors can also affect how much house you are approved to purchase:
- Current mortgage rates. Mortgage rates fluctuate constantly. For example, if you were to purchase a $200,000 home at a 3.75 percent interest rate, a 0.5 percent interest rate increase would up your monthly payment by $57.
- Mortgage insurance. Unless you are making at least a 20 percent down payment, you will be required to pay mortgage insurance. Your rate of mortgage insurance is determined by your loan program and can be affected by your credit score and down payment percentage.
- Home type. If you are purchasing a condo, townhome or a home within a homeowners association, it's likely that you will have to pay a condominium or homeowners association fee. These fees cover the costs of maintaining common areas.
- Credit history and score. Your credit can affect your ability to qualify for a mortgage and your interest rate, depending on your loan program.
- Fees and closing costs. Closing costs are fees charged by your lender and other third parties associated with the purchase of your home. These costs typically range from 2 to 5 percent of a home's purchase price. There are ways to minimize closing costs, but you will have to factor them into your home affordability.
- Lifestyle and future plans. Though your lender doesn't weigh your lifestyle and future plans for a mortgage approval, it is important to discuss your financial and mortgage goals. Remember to buy what you can afford now, not what you plan to be able to afford 10 years down the road.
Currently, mortgage interest rates are still near historic lows. If you're considering purchasing in the near future, contact one of our mortgage bankers for rates. If you're weighing the costs of a mortgage, use one of our mortgage calculators.
Looking for more info about purchasing your first home? Download our free Mortgage 101 Handbook, a great reference for first-time homebuyers.