Post-holiday fuzzy 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.
But if you’re house hunting, it’d be wise to know how much house you can afford prior to hitting the listings.
This generally means getting pre-approved so you know exactly how much you can borrow. A mortgage pre-approval will also tell home sellers and real estate agents that you mean business.
Consider Your Appetite and Your Lender’s
When speaking of affordability, you’ll need to consider 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.
This 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 be several hundred dollars a month.
(Are mortgage rates higher on a condo?)
In short, your actual housing costs will exceed the principal and interest owed on your mortgage.
Bankrate Daily Mortgage Rates
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.]
Avoid Jumbo Mortgages
And if it’s really large, you could wind up in the jumbo loan realm, which is currently as high as $729,750, but expected to fall to $625,500 come October.
If you find yourself on the cusp, it’d 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 lead to a lower mortgage rate.
In closing, just because you can afford/qualify for a mortgage doesn’t mean you should take one out.
With homeownership there will come unexpected costs and maintenance, so be sure to set aside money for such occasions.
And 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.
Shop Around for the Best Rate
Finally, shop around! If you can secure a lower mortgage rate, you’ll be able to take on a larger mortgage.
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, and enlist a mortgage broker or two.
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