Mortgage is everyone’s number one concern when buying a house, so understanding how it all works is vital for your home decision making.
Your house is definitely one of the biggest and most important decisions in our life. When buying a home, everyone asks “how much can i borrow?”, in fact this should be the second question you should be asking.
Instead, you should be asking what house meets your affordability. That’s because, with all the frustration involved in wanting to have an approval for a home loan, lenders are more than often loaning out more money than you can afford to pay off.
However, the good news is that calculating a smart home budget isn’t as complicated as it sounds. It’s quite straightforward and doesn’t consume much time, if you do it the right way.
Keep reading to understand just how you can calculate how much of a mortgage you qualify for.
How Much Mortgage Can I Afford
We understand that buying a home isn’t just exciting but also involves a lot of angst. As much as you want to be a homeowner, a lender will be more than willing to loan you money. Moreover, the more the money they loan out, the happier they will be.
You’ll understand this when you calculate the estimated interest charged on your loan amount. It’s definitely a huge number. This sure sounds surprising, but to be honest, this is the reality when it comes to loaning a mortgage amount.
However, once you know how much mortgage you can afford, you’ll indefinitely want to learn how much of it you can borrow. In order to calculate how much home you are able to afford, is when the mortgage qualification calculator comes in.
There are a few items to be taken into account when calculating your affordability for a mortgage like your monthly debts, household income and your current available savings for a house down payment.
Mortgage Qualifier Calculator
It’s a basic concern of every home buyer to understand their monthly payments. Even though your household incomes and monthly debts might be stable, you could still face unexpected financial circumstances that can have an impact on your savings.
This is the Bank Rate’s mortgage calculator which we will be sharing with you how the calculations are done.
Mortgage Calculator: Bank Rate
A mortgage calculator requires you to input these numbers:
Annual Income (Before Taxes)
Before you start planning on the type or even the style you want your house to be renovated in, you need to punch in your annual income, before taxes into the mortgage qualifier calculator. Remember to include your partner’s or co-buyer’s annual income as well if applicable.
Remember to include all of your revenue streams from investment profits and alimony to rental earnings coming in each month.
The next number you’re supposed to punch in is the total down payment. A down payment is a part of the sale price of the house you’re hoping to buy, which isn’t financed.
Whether you’re loaning the mortgage amount from a bank, credit union or any other form of londer, a down payment is mandatory. It allows the lender to know if the borrower is a risk when loaning out the amount and if they’re serious.
The interest rate will be calculated according to the current rate in place right now, in the state you’re planning to purchase a home. Getting a low interest rate allows you to save a lot of money over your loan term.
Lenders have a few criterias when deciding the interest rate, such as high credit scores, low debts and the amount of your down payment.
According to bakrate’s recent survey, the 30-year mortgage loan terms interest rate is 3.030% with an annual percentage rate of 3.390%. And the 15-year mortgage loan term interest rate is 2.580% with an annual percentage rate of 2.910%.
The more popular loan term is the 30-years term, but it ultimately depends on you as people also tend to choose a charter pay off term.
Lastly, you need to tally up all your expenses and input the number in the mortgage calculator. These expenses include the money that is paid or used on a monthly basis. Remember to be accurate on the number, as you need to be aware of how much you are spending.
Your expenses will allow the calculator to calculate just how much mortgage you are able to afford.
By including all of the above information in the mortgage qualifier calculator, it will give you an estimate of the maximum amount of mortgage you’re eligible for and a rough calculation of your monthly mortgage payment.
“What If” Scenarios
The interesting part of the mortgage dualifer calculator is that you can utilize is it to run some possible scenarios such as:
- What’s the maximum number of years you’ll live in this home? This will have a great impact on your decision when you’re choosing a loan term. The longer the term is, the more afoodable your monkey payment will be.
However, do note that you’ll eventually end up paying a larger amount of interest during the long term. Whereas, if you were to choose a shorter term, such as a 15-year fixed rate mortgage term, your interest will be less but the monthly payments will be considerably higher.
Hence, it’s important to know just how long you plan on living in the house you’re purchasing.
- Should you opt for an Adjustable-Rate Mortgage (ARM)? If you intend on staying in the house for just a couple of years, 5/1 ARM is likely to be a good option for you. You’ll be able to enjoy lower fixed interest rates for the first five years, but it will change yearly once the initial years are over.
- Are you loaning too much? Of course, lenders will be more than happy to have you receive a big loan, but the question is, how does it make YOU feel? Does it make you comfortable with how it’ll affect your monthly budget?
Also consider how the loan amount will impact your future spending goals like holidays and savings.
- How much down payment should you make? Now, this is the big question you should be asking yourself when buying a house. Do you prefer to put down a smaller amount and make it up by paying larger monthly payments, and perhaps having to even pay mortgage insurance? Or vice versa?
Think it through before you decide on your down payment amount. Take your current savings and expenses into consideration as you don’t want to take up an additional loan to cover your day-to-day expenses just because you’ve decided to put down a large down payment.
Factors Impacting How Much You Can Borrow
Lenders in general have certain factors that they consider when determining the mortgage amount you qualify for, such as:
Debt-to-Income (DTI) Ratio
Your DTI does a comparison of your monthly income in relevance to your monthly debt. Individuals who have a higher debt relative to their monthly income, will have a high DTI as compared to someone who has a lover debt relative to their monthly income.
Your DTI ratio is vital as it shows lenders your bandwidth to take up more debt. In simple terms, the higher DTI you have, the harder it’ll be for you to get a mortgage, and even if you do get a mortgage, it’ll be highly unlikely that you get a good interest rate.
You can easily calculate your DTI by adding up you totally monthly debts, and divide it by your monthly income, both before taxes and deductions
Hence, as a borrower it’s best to pay off your existing debt as much as you can so that you are qualifiable for a mortgage, and have the room to make the monthly payments. By paying your debts off, you’ll indefinitely be in a much favourable position to accommodate your monthly costs.
It’s always smart to have your credit in order before you decide to apply for a mortgage. You can check and evaluate your credit via these three agencies – Experian, Equifax and TransUnion. You’re eligible for a free copy yearly per each agency.
Your credit score will have an impact on the pricing of your loan. If you find errors in your credit report, make sure to alter the agency as soon as possible. You’ll have to further prove that the claims are wrongly reported by showing evidence, such as payment history.
Your Loan-to-Value (LTV) Ratio
The loan-to-value ratio is the amount of money you’ll be able to put down. Technically, the lower this ratio is, the higher your chances of getting a mortgage and a lower interest rate. A ratio with 80 percent or low, will help you in avoiding paying for private mortgage insurance and will further enable you to qualify for more than one loan option.
What Is A Good Loan-To-Value Ratio? Generally, the lower your LTV, the better your chances are of getting approved and getting a lower interest rate. An LTV of 80% or lower will help you avoid paying for private mortgage insurance and will allow you to qualify for a wide range of loan options.
In many aspects we need to be aware that the money lending industry is in some ways working against our best interests. If the lender deems you as a qualifiable borrower, there’s a high chance that they will approve you for the maximum loan amount. In fcat, they might just get a little too generous.
Buy a home means that you’ll be dealing with large numbers, and that too quite often. The main challenge when it comes to buying a house, is having a house that meets both your current and future needs.
Moreover, it’s also important to leave money for your other priorities, such as travelling etc. All in all, don’t just lose hope after speaking to a new lender, speak to more than one as it may be illuminating to realise the different loan amounts elders are willing to qualify you for.
We hope this shed light on just how much of a mortgage you are eligible for and what can be done to improve your chances in getting one or qualify for one.