Mortgaging your house or any part of your asset is in some cases a legal obligation when it comes to taking a loan. A mortgage can be simply defined as part of your asset being held up in exchange (like collateral) when you’re asking for a loan from banks or any organizational entity.
The policy’s length will determine the number of years you have until you fully pay off your mortgage. In such a case, your house lender is the beneficiary. In case you die, the insurance company will pay off the remaining debt to your broker, NOT your spouse or your family.
People can have a joint mortgage life insurance plan; for instance with their spouse. If both the people die at the same time, the company will cover the mortgage life insurance cost and pay off your house lender. If one of the two people dies, the spouse will have to continue paying.
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How much House can I afford: Calculator
Everyone dreams of having a huge house with high ceilings and a beautiful patio, but not everyone can afford a house like that. So how much house can you really afford? To calculate how much mortgage you need, there are several ways to calculate the ratio online, for instance websites like Mortgage Calculator help you in giving an estimate of what you should be expecting.
The 28/36 Rule for Affordability
One rule of thumb that lenders may use to assess how much of a mortgage you qualify for is the 28/36 rule. This rule says that your mortgage payment (which includes property taxes and homeowners insurance) should be no more than 28% of your pre-tax income, and your total debt (including your mortgage and other debts such as car or student loan payments) should be no more than 36% of your pre-tax income.
While these numbers are used as a guide by many lenders, there are some cases where you may be able to have a higher. For example, some lenders may allow borrowers with a higher credit score to have slightly higher DTI ratios. And some loans allow for higher DTIs, such as FHA loans, which allow up to 43% or higher in some cases.
Getting Pre Approval
A preapproval simply means that a lender has gone through your financial situation, credit history, insurance records, debt and other notable data. After that, the loan officer determines how much loan you can borrow and how much monthly you will be able to pay for the mortgage.
There is no time limit or a hard and fast rule about how far in advance you should get pre approved for a mortgage, but most experts advise that you should apply for pre approval before you even start looking for a home. This is because you will know exactly what type of house you can afford to buy.
Sometimes people find a house they love, and it often exceeds their pre approval budget and they have to start looking for a cheaper option again. So having pre approval before looking for a house saves you from the disappointment and heartbreak of letting go of the house you really loved.
This metric shows how much debt you already have against your monthly income, and mortgage lenders want it to be less than 43%. That is how you will qualify for a second mortgage.
A good debt-to-income ratio to qualify for a mortgage is around 35%, but lenders prefer that it be below that. And of that total debt, not more than 28% should be going to repay the mortgage loan.
For example, assume your gross income is $5,000 per month. The maximum amount for monthly mortgage-related payments at 28% would be $1,400 ($5,000 x 0.28 = $1,400).
Your lender will also look at your total debts, which should not exceed 36%, or in this case, $1,800 ($5,000 x 0.36 = $1,800). In most cases, 43% is the highest ratio a borrower can have and still get a qualified mortgage. Above that, the lender will likely deny the loan application because your monthly expenses for housing and various debts are too high as compared to your income.
To know how much mortgage can I afford on my salary calculator, you can run the numbers through an online affordability calculator to have a fair estimate of what numbers you should be expecting.
How much Mortgage can I afford?
Based on the above assumptions, you should be able to guess how much mortgage you can afford based on your salary.
Here is a table of your maximum monthly payment under the Dave Ramsey approach to mortgages. (I’ve assumed that the take-home pay is 75% of gross income.)
|Gross Income||Monthly Take-Home||Maximum Monthly Payment|
Loan Prequalification Calculator
Before you even dive into the mortgage market looking for lenders, it is better to do a bit of homework on your own. To do this there are plenty of online preapproval mortgage calculators available through which you can get an estimate of how much loan you can afford and for how long you will have to pay monthly.
Here is a list of information that is needed for the calculator to run the algorithm, and you will have to:
- Enter your annual income before taxes.
- Enter the term of the mortgage you’re considering.
- Enter the interest rate for your mortgage type or use today’s mortgage rate.
- Select your credit score range.
- Tell us about your employment status.
- Tell us if you have a down payment.
- Tell us about past foreclosures or bankruptcy.
- Enter your monthly recurring debt payments.
Even though it is recommended that you should meet your lender in person to discuss the terms and conditions of your agreement, ask questions and get answers. But that isn’t the only way. Once you decide to move forward with the mortgage application with your chosen lender, you can easily get the pre approval online through email or through fax.
It is still always better to compare lenders and their rates, and often their policies too. Most mortgage lenders try to customize policies to suit the needs of their customers, and this can only be done if you meet with many lenders and compare rates.
How much Mortgage can I qualify for FHA?
FHA loans, as opposed to conventional loans, are very popular in the mortgage market. They are backed by the federal government, meaning the government gives lenders some guarantee on the loan, making it easier for lenders to trust the borrower.
The lender or banks who give out these mortgages are backed by FHA, which is why they have a downpayment as low as 3.5%. This is what gives lenders an edge even if the borrower defaults on the loan.
Even though it may seem that it is relatively easier for a borrower to obtain an FHA loan, there are certain requirements that set the bar for applicants. Here is what you need to know.
Credit Score and Downpayment: Just like any other loan, an FHA loan is also heavily dependent on the credit rating of the borrower. It should be at least 500-579, that is when you get a downpayment of 10%. But if your score is 580+, you could be eligible for only a 3.5% down payment rate. It all comes down to this: having a higher credit score will get you a good deal.
Debt-to-income ratio: A DTI is a measurement metric that simply evaluates how much debt you have against your current income. More DTI will reduce your chances of being qualified. The DTI should not be more than 50%, and you’re in the safe zone if it is below 43%.
Primary residence: One of the requirements for an FHA loan is that the property should be the primary residence of the borrower, and that it should meet the minimum criteria of FHA property requirement.
Proof of employment: The borrower needs to prove that he is employed and has a steady source of income to be able to pay for the mortgage loan. This is not a very hard requirement to fulfil though, because most people look for mortgages while they already have a steady income from their employment.
It’s no secret that these days people are hardly able to afford big fancy houses without a mortgage, and often that mortgage takes out a chunk of their income. So the best way of getting ahead of this is buying a house that you can really afford. Besides, the mortgage lender will also only allow you the mortgage that he is certain you can pay off in due time.
Usually the primary requirement is the income a mortgage borrower has, and how much they can pay back. You can qualify for a mortgage based on your income, credit history, insurance records, debts and liabilities. It all comes down to how much mortgage you can afford to pay each month, along with other basic necessities like food and rent.
Shop around for the cheapest mortgage rates to be able to get the best deal possible!