What Kind of Mortgage can you Afford?
I want to buy a house. I don’t know where to start. What can I afford? How much money do I need to have?
Follow this step by step guide and find out!
First thing: You need to figure out what number fits comfortably in your budget as a monthly mortgage payment. This way, you can do the math yourself, before you speak to a mortgage lender.
Let's say that comfortable monthly number is $3500.
Your next step is to figure out what location you are looking to buy in, and take an average of property taxes in that neighborhood.
Say the number is $9,000 in taxes. You then add another $1,800 for homeowners insurance.
You now have $900 from your original $3,500 dollar monthly mortgage payment allocated towards taxes and insurance.
You now have $2,600 for the principal and interest payments. Using a 6.75% interest rate (just google what the prevailing interest rate of the time), the monthly payment amount will be $2,594.39. This means, assuming a 30 year mortgage, the total amount of mortgage you can afford is 400k.
The next step is to figure out what you can afford for a down payment.
Let's say you have say 100k available. We now have to subtract closing costs from that number to discover the available sum for a down payment. (For example, if you're buying in NJ, take out 15k in closing costs.) Your buying power in this scenario is the mortgage (400k) plus down payment (85k)
So your purchase can be up to 485k.
Now, to afford the loan with underwriting, you need to be earning double the amount of your total monthly loan payments. You need to add the amount of your monthly loan expenses to the mortgage payment amount. Expenses can be car lease or loan, student loans, or credit cards.
Let's say you have a 500 dollar car loan + mortgage payment of 3500 = the total amount of the car and future mortgage is 4000. Double it - and your monthly income has to be 8000 monthly.
This is a very quick and easy way to see if your future house is affordable, and if you will get approved for a mortgage!
