Applying for a mortgage is a convenient way for most people to buy a house. That’s why it’s crucial that you plan everything out to ensure that your loan can get approved. One of the first things that you need to do when buying a home is to get an idea of how much you can afford to pay monthly, even before you apply for a mortgage. With house prices continually changing, working out how much you could be approved for could spell the difference between turning your dream home into reality or momentarily keeping it in your imagination.
Finding out how much you can afford
There are several ways to find out your financial capacity to pay for a property. One way of doing this is by looking at your gross income. You need to ensure that the cost of the property is between two and two and a half times your gross income. So, if you’re earning at least $100,000 per year, you can afford to pay for a mortgage loan in Ogden that costs between $200,000 to $250,000.
However, there are other factors that you need to consider when finding out how much you can afford. Aside from your gross income, you also need to think about the deposit. Usually, banks and other lenders will require a deposit of at least 20 percent for regular homes. The bigger deposit they’ll need from you, the more you should be able to borrow.
Income and expenses are also a few of the most things that you should think about, too. What you and your household spend every week has a considerable impact on the amount that you can borrow. 7News says that if you’re saving for a deposit, you need to review carefully your budget each month. You need to be realistic about it and ensure that you have an overview of all your expenses.
Understanding the lender’s criteria
While every lender has their criteria when it comes to affordability, the term and the amount that you can borrow depends on several factors. Investopedia says that aside from your gross income, lenders will also check the front-end ratio. This means that the principal, interest, taxes, and insurance shouldn’t go beyond 28 percent of your gross income. Although most lenders would often allow borrowers to go beyond 30%, it’s still best to be on the safe side.
DTI or debt-to-income ratio is also another factor that most financial institutions check when someone is applying for a loan. DTI typically covers the existing debts of prospective borrowers. It often includes credit payments, outstanding loans, and even child support. You need to ensure that your ratio is at least 50% of your monthly income. Going over it may put your dream home on hold.
Understanding the amount that you can borrow for a loan is crucial to your loan’s approval. That’s why it’s vital that you apply for loan preapproval so that you’ll know how much your lenders will allow you to borrow.