More mortgage Q&A: “What mortgage amount can I qualify for?”
After a long holiday weekend, the last thing anyone wants to do is crunch numbers. Heck, no matter what day it is no one wants to do the math.
But if you’re house hunting, it’s pretty important to know how much house you can afford prior to hitting the listings over at Redfin or Zillow.
This generally means getting pre-approved so you know exactly how much you can borrow. A mortgage pre-approval will also show home sellers and real estate agents that you mean business.
Without one, they may just think you’re a looky-loo, or not serious about buying their home. Even if you don’t visit a lender first, it’s really important to gauge your purchasing power so you don’t waste your time or anyone else’s.
What You’re Comfortable With vs. What Your Lender Will Allow
When considering mortgage affordability, you’ll need to assess both your appetite for housing costs and those of the bank or mortgage lender eventually granting you financing.
Sure, you may have some flexibility, but the lender will have well defined debt-to-income ratio requirements that will determine how much you can borrow to a T.
This precise number will be based on your gross monthly income over the past two years, not just that “big month” you had.
So take a good look at your income and your debt obligations to determine where you stand (I made a handy mortgage calculator to calculate it).
[See also: Mortgage vs. income]
And when plugging in your loan amount, be sure to consider the entire mortgage payment, that is, principal, interest, taxes, and insurance, otherwise known as PITI.
If it’s a condo, don’t forget the HOA fees, which can amount to several hundred dollars a month and seriously change the outcome.
In short, your actual housing costs will exceed the principal and interest owed on your mortgage. So the mortgage amount you think you qualify for could be lower once these other costs are factored in.
In any case, you may not be comfortable borrowing as much as you’re able to qualify for. And that’s perfectly okay. You may want to set aside more cash each month for other things, such as investments, an emergency fund, etc.
You don’t have to borrow the maximum amount the lender approves you for. Some may even argue that you should borrow less to give yourself a cushion.
How Much Are You Willing to Put Down?
How big your mortgage is will depend not only on the price tag of your new home, but also how much you can or are willing to put down.
If you don’t have much money in the bank, or simply feel your money is better off elsewhere, you’ll need a larger mortgage.
But a larger mortgage amount will mean a larger monthly mortgage payment, which could limit you.
[See: Mortgage down payment primer.]
The down payment piece can really change the math because someone willing to put down 20% will require a much smaller mortgage amount than someone only willing/able to come in with 3%.
For example, a $300,000 home purchase with 20% down requires a $240,000 loan amount. The same purchase with 3% down requires a $291,000 loan amount. That’s a huge difference.
The monthly P&I payments would be $1145.80 and $1389.28, respectively, for a 30-year fixed mortgage set at 4%.
There’s a decent chance you could qualify for the lower payment and not the higher one, so again, down payment is paramount in determining the mortgage amount you would qualify for.
Picking a Certain Loan Amount to Avoid a Jumbo Mortgage
If you find yourself on the cusp, it might be wise to bring in a little extra down payment to qualify for a conforming loan amount, which will make financing easier to obtain and likely lead to a lower mortgage rate.
Of course, there are some aggressive jumbo lenders out there that have been known to beat conforming pricing, so it’s not necessarily a deal breaker to exceed this loan limit.
Have the individual you’re working with compare both scenarios to see which makes more sense financially.
Shop Around for the Better Rate So You Can Borrow More
Finally, shop around! While this may go without saying, if you can secure a lower mortgage rate, you’ll be able to take on a larger mortgage because it’ll be cheaper.
Don’t be one of the many consumers that only obtains a single mortgage quote. You’re simply throwing away your hard-earned money.
Check rates with your local bank, compare rates online, or enlist a mortgage broker or two to do the searching for you.
Even a difference of an eighth of a point can make a difference, so be sure not to underestimate the potential savings or costs.
In closing, just because you can afford/qualify for a mortgage doesn’t mean you should take one out. And as noted, you don’t have to borrow up your limit. You can borrow less!
With homeownership there will come unexpected costs and maintenance, so be sure to factor those in and set aside money for such occasions.
Also consider your job security – you won’t want to go nuts and buy too much house based on the expectation of future earnings, especially if you see them being at risk of falling or disappearing entirely.