A huge part of being a successful and financially healthy homeowner is ensuring that the house you buy makes sense for your budget – now and in the future. One of the most common questions our agents are asked at Nickel City Funding is, “How much mortgage can I afford?” A mortgage is a big investment, and it’s important to consider how it will impact your overall financial status. It’s important to find a home you love with the right home financing that won’t wreck your budget and send you into debt. You’ll need to think about your mortgage payments and the other associated homeowners’ expenses that come with it. The team at Nickel City Funding is here to help when you’re ready to learn more. Contact us about home financing in North Tonawanda, Hamburg Amherst, West Seneca, and Lancaster, NY.
List Out Your Finances
Before you can determine how much mortgage you can afford, you’ll need to look closely at your financial health to see how much you can truly dedicate to a mortgage payment. You’ll need to collect records of:
- Your monthly income from your employment and any other sources of income. If you’re self-employed, you’ll need to gather profit and loss statements and other documents that show your income from the business.
- Any debts like college loans, credit card balances, personal loans, and other monetary obligations like car payments, gym memberships, internet and cable, and cell phone service.
- Any savings you have, including savings accounts, stocks, CDs and other securities.
- Average monthly spend on groceries, recreational activities, charitable donations, and other expenditures.
Once you’ve figured out your budget, you can determine how much you can reasonably afford for a mortgage payment. If you’re currently renting or have another mortgage, your new mortgage won’t necessarily be the same – you may end up paying more or less depending on your rates and terms.
Your debt-to-income (DTI) ratio is an important metric that can aid us in determining how much mortgage you can afford. Your DTI is the percentage of your gross income that goes toward debts and associated taxes and fees. Typically, you should have no higher than a 43% DTI to get approved for a mortgage. If you have excessive debt, you should consider paying down some of it before taking on a huge financial commitment like a mortgage.
Your expected monthly mortgage payment should not exceed 28% of your gross monthly income (before taxes), and your total mortgage and homeowners’ expenses (the mortgage premium, property tax, mortgage insurance and homeowners’ insurance) shouldn’t exceed 32% of your gross monthly income.
Closing Costs, Down Payment and More
In addition to budgeting long term for your mortgage, you’ll need to consider the up-front costs. Most mortgages require at least some down payment (though there are rare exceptions like VA loans that do not have a down payment requirement). If you can afford it, putting at least 20% down is a good idea, because you won’t have to pay private mortgage insurance (PMI). We know, of course, that many people do not have that much cash on hand, so there are many solutions like FHA loans (with as low as 3.5% down) with lower requirements. Some of these, however, have a mortgage insurance requirement for the life of the loan.
Closing costs are another up-front cost to consider. Usually, they’re between 2% and 5% of the total value of the mortgage. In some cases, you may be able to put in your contract that the seller pays some or all the closing costs.
We’re Here to Guide You
If you’re wondering, “How much mortgage can I afford?”, the team at Nickel City Funding is here to help. We find match clients with the best-suited mortgage options for their needs. If you’re looking to purchase a home in North Tonawanda, Hamburg Amherst, West Seneca, or Lancaster, NY, contact us for a consultation and free quote.