A new mortgage is a different type of expense that needs to fit easily into, and be managed as part of, your monthly and yearly budget – without creating financial strain. Whether you qualify for a mortgage is determined by your current budget situation. You won’t know what size of a loan you can afford until after you qualify.
How do I qualify for a mortgage?
Qualification is based on your debt-to-income ratio. This is the amount of debt you have compared to your income. It is determined using the information you provide when first applying for the loan. It’s calculated by adding up all your monthly debt payments, and dividing them by your gross monthly income.
Here’s an example from the Consumer Financial Protection Bureau*:
If you pay $1,500 a month for your rent, and another $100 a month for an auto loan and $400 a month for the rest of your debts, your monthly debt payments are $2000. ($1,500 + $100 + $400 = $2,000.) If your gross monthly income is $6,000, then your debt-to-income ratio is 33%. ($2000 is 33% of $6,000.)
A high debt-to-income ratio can suggest making monthly mortgage and repaying the loan might be a problem. A number below 43% is generally considered acceptable when qualifying for a mortgage.
How much can I afford?
One key consideration is how much down payment you’ll make. 20% of the home’s asking price is most common. Anything above that can often result in a better rate or term. For an amount below 20%, lenders may require additional mortgage insurance to protect them against default.
Use our Mortgage Calculators to find out how much mortgage you can afford.
A PrimeLending Home Loan Expert can help you find the type and size of loan that will work best for you. Contact us online or call 800-317-7463.