One of the biggest mistakes you can make is buying a home you can’t afford. If you borrow too much, a bad turn of events—like job loss—can quickly make monthly mortgage payments unmanageable. Luckily, there are mortgage loan services that can help you estimate how much you can truly and comfortably spend on a house. It’s also a good idea to remember the following when deciding on how big of a mortgage you should take on.
The formula
Most home buyers can afford to buy a property that’s worth between 2 and 2.5 times their gross income. So if you’re earning $100,000 annually, you should be able to afford a $200,000 to $250,000 mortgage. But that’s just a general guideline. A mortgage loan officer in Georgia will be looking into other factors, too, such as what they think you can afford and personal criteria outside of your finances.
Every lender has a unique set of criteria, but the terms and size of the loan and your ability to purchase will largely depend on these factors:
- Gross income – This is your income before taxes. It includes your self-employment earnings and/or salary, any child support, disability, alimony, or social security you receive, etc.
- Front-End ratio – This is the percentage of your yearly gross income that is dedicated to monthly payments (the principal, interest, taxes, and insurance). In general, monthly payments shouldn’t exceed 28 percent of your gross income. That said, some mortgage loan services allow certain borrowers to go beyond 30 percent or even 40 percent.
- Back-end ratio – Also called ‘debt-to-income ratio,’ this is the percentage of the gross income that goes towards covering debts like outstanding loans, car payments, and child support.
The impact of your credit score
One of the functions of a mortgage loan officer in Georgia is to assess how good you are at paying loans. To do this, they look at your credit score. A low score—which indicates that you’re a higher risk borrower, may result in higher interest (annual percentage rate) on the loan. So, if you’re planning to buy a home in the future, it’s best to start building a good credit score today.
Calculating the down payment
A down payment is usually required by lenders and is typically at least 20 percent of the property’s purchase price. However, some lenders allow a smaller down payment. Of course, the more money you can pay towards the down payment, the less financing you will need.
How lenders make their decision
Lenders will often look at your income, assets, liabilities, and debt. They want to know how much you are making and the current and future demands on your income. Their job is to make sure that you can consistently make payments. Ultimately, it’s the down payment, your monthly expenses, and your income that serve as base qualifiers, and your credit score and history determine the rate of interest.
Don’t be house poor
Keep in mind that a mortgage loan officer in Georgia will consider more than your gross income when establishing how much home you can afford. If you want to be financially prudent, look at your net income or take-home pay instead. Make sure that you’re not putting more than 25 percent towards mortgage payments. Otherwise, you could become ‘house poor,’ without enough money for other essentials and nothing left to save for your retirement.
It’s also important to take a good hard look at your personal financial situation and ask yourself if you’re truly ready for a mortgage. Are you living from paycheck to paycheck? If yes, then the smallest deduction from your monthly budget could be disastrous. Perhaps you should build your income first and secure the stability of your job.
Lenders will only look at your existing debt when calculating the back-end ratio. But what about the other expenses that you might have in the future? Be sure to take into account your children’s college fund, a new car you might want to get someday, or a vacation you want to take.
Don’t forget the costs beyond your mortgage. There are many other expenses that come with being a homeowner, such as home maintenance costs, utilities, décor and furniture, and neighborhood association fees.
Finally, think about your lifestyle. Are there changes you can make to make paying for a home less stressful? Review your spending habits and make adjustments as necessary.
