Visiting friends with a great house may get you wondering as to when you will own your dream home. You may have already begun to browse the real estate listings. But once you see how much these houses cost, it can get very frustrating. Can you really afford a home mortgage loan? If you decide to continue with the pursuit of owning your dream house, the most important question you should answer is what can you afford?
Buying a home is a matter of choice. But most of the time, you cannot simply point your finger to the most desirable home in the most ideal neighborhood in town and whip out the money to buy it outright. Especially if you realize the amount of money you need in order to buy it. What is unfortunate about this is that you have to settle on what you can afford, which, may lead you to another frustration. Thus, making sure first that you know your financial limits is your very first step before you consider a home mortgage loan
Plan ahead to before choosing a lender
Lending institutions are fully aware that the first bill most of us pay is the mortgage. They also know that your home mortgage loan will soon be sold to another lender and that should any problems arise with paying back the loan, it won't be their problem. They will already have made their commission and moved on to the next customer while you will be saddled with hefty payments.
It pays to do your homework before deciding how much to spend on a new home. Take into account all your monthly expenses, not just debt and housing costs. You will need to consider food, electricity, phone, and insurance, along with the numerous expenses that crop up each month. Be a smart home mortgage borrower and know all the facts before you sign on the dotted line.
There are three important factors to consider when you want to know how much you can afford
Do you have enough saved to pay a deposit on the loan?
When you are ready to buy a home, to figure out how much money you can afford to spend on a home mortgage loan, you will have to draw up some figures. You first need to decide how much of a deposit you can make and deduct this from the price of the home. What is left will be what needs to financed by a home mortgage loan.
Savings is very important while considering home mortgage loans. Good savings can give you better chances of owning a better, more expensive home. This is because the amount of the down payment you can afford will definitely reduce the remaining cost you have to pay for the house, which in turn reduce your home mortgage, making monthly payment more affordable. Thus, it is a good idea to save as much money as you can for down payment in order to afford a bigger home or to lower your home mortgage.
How much home mortgage and interest you can afford?
Before applying for home mortgage loans consider not only the mortgage but also the repayments you can afford. Essentially this would depend on your annual income and your monthly debt obligations such as car loans, child support payment, credit card payment, etc. Ideally, the payment-to-income ratio should not exceed to 28% and your debt-to-income ratio should not exceed to 36%. Payment-to-income ratio and debt-to-income ratio are used by most lenders to determine how much you can afford.
How much will your lender approve?
The amount of home mortgage loan the lender will approve will depend on your income, credit report, and other factors. This is why, in order to get a reasonable amount of loan, you need to demonstrate that you have a good and permanent source of income and good to excellent credit score. Although loans can be approved for people with bad credit ratings, the interest can be enormously high.
To find out how much you can afford each month, you need to work out your monthly expenses and the cost of housing. Each month, the taxes, interest and principal on a home mortgage loan should not be more than 25%-28% of your pre-tax, gross income. This figure will also depend upon how much debt you have to start. Also remember to add in utility costs for your new home as well.
You now need to determine your outstanding debt. For this purpose you will need to include not only the home mortgage loan payment, but any credit card bills, child support or alimony payments you make, student loans and any other outstanding monies you owe. This figure should not be more than 35% of your pre-tax, gross income.
The home mortgage rate you will be offered will be decided by the amount of debt you have outstanding, not just your income. This is called your debt to income ratio. If you have a lot of outstanding debt, your rate will not be as attractive as those offered to people who are carrying less of a debt burden. It is up to you to understand how much money you can afford to pay a home mortgage loan each month and not the lender.
It is not very often that you buy a home. In fact, most of us might be able to buy a home once in our lifetime. So when you do, you want to the process to be as smooth as possible. Consider first how much you can afford before you look on the listings and circle around houses that you want. Remember to seek professional advice from lending consultants and get pre-approval as this will help in making the whole home buying process easier and convenient.
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