What Percentage of your Income can you afford for your Mortgage?
In the mortgage, there are few “rules” which state that what percentage of your income you can afford for your mortgage. There are few factors to consider in this scenario like what makes one rule better than the other one? How do you know what is right for you?. We will consider that what are the different options and how to measure up for you.
Step 1: Calculate your Housing Payments
There is one more thing which is more than principal and interest that is understanding a housing payment. Rather than mortgage you also have to pay homeowner’s insurance and real estate taxes. In the conventional loan, if you will don’t put down 20% then you also have to pay Private Mortgage Insurance. Even if you use FHA or USDA loans, you have to pay mortgage insurance. The total housing payment is all made up of these costs.
The second thing you should find out to know that what percentage of your income you can afford for your mortgage is your real estate taxes. Find out the area where you want to live and then look up the property taxes for the area. This will give you an idea of the monthly real estate taxes. You can also inquire from your insurance agent what the standard homeowner’s insurance rates are for the area.
Step 2: Find out the 28 percent of your gross monthly income.
Calculate the 28 percent of your gross monthly income, to figure out the percentage of your income you can afford for your mortgage. This gives you a preservationist amount to work with because you are using pretax dollars. Remember, you still have to pay for your health insurance, taxes, and retirement savings contributions. Taking 28% of the gross amount you bring home leaves enough for other debts and daily living.
For Example-
You earn $35000 per year. This equals $2,916 gross per monthly income. Of that $2,916, you can pay $816 towards your total mortgage payment. Figure in your homeowner’s insurance at $450 per year, so $37 per month. If the real estate taxes in the area you want to live equal $2,500 per year, this equals $208 per month and you have $571 left for principal, interest, and mortgage insurance. In case you did not need mortgage insurance, this means you could afford to borrow around $123,000 for a home. If you add the down payment you can afford to this amount, you have the total amount you can afford to pay for a home.
Step 3: Calculate your other debts
Find out the total of your other debts to know that what percentage of your income you can afford for your mortgage. Other debts like your student’s loans, car payment, and credit cards it is not related to your house. You have to pay these debts alongside your mortgage. Your total payments should be under 36% of your gross income. If it is more than 36% then it could take away from the amount you can afford on your home.
For Example-
You have your car payment of $200 per month. You also have minimum credit card payments totaling $100 per month. This means $300 per month in other debts. If you add $300 to the $816 (28% mortgage payment from above), you have a total of $1,116. With a $2,916 salary, this equals 38% of your gross income. This is too high. You have two choices to decrease an amount- you can take a smaller mortgage or pay off your credit card debt. If you were able to pay your credit cards off, it would decrease your monthly debts by $100. Now you only have to worry about your car payment and potential mortgage. If you use the $816 payment, you have a total of 35%. Your total debt-to-income ratio can’t exceed 35%, so you either need to pay off existing debts first or borrow less money to buy a home.
Step 4-Closing Costs and Fees
In addition to your down payment, you will also want to account for closing costs and broker fees. You have the option of paying up to 5 percent of the mortgage loan amount in closing costs. Therefore, on a loan of $123,000 that would be $6,150. Remember that your down payment and closing costs are not the only funds you will need. You will also be responsible for prepaid expenses, such as the mortgage interest charged on your loan after closing.
Final Thoughts
There are many lenders in California. However, 3CALoan can help you find a mortgage loan fitting your personal and housing needs. Our competitive rates, efficient services, and talented team can help to find the percentage of your Income you can afford for your Mortgage. We help our customers every step of the way. We prioritize informing and educating our clients about the home buying process. Our client’s happiness and confidence upon closing a deal reflect our excellent quality services. To find out more information about mortgage and how we can help, contact us at (818) 322-5626.
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