To establish how much mortgage you can realistically afford, you can use one of two main formulas - called "Qualifying Ratios". Qualifying ratios examine a person's income and expenses in order to estimate how much money can reasonably be spent on monthly mortgage payments.
Buying the Home: Down Payment and Closing Costs
This is the first and most obvious factor most people consider in buying a home. How much of a down payment can I afford? And how much can I spend on closing costs?
The down payment is usually between 3% and 20% with most conventional loans preferring down payments within the 10-20% range. Low-to-moderate income households, however, can find programs enabling them to purchase homes with as little as 3-5% down.
Closing costs are fees for various items that must be handled through your lawyer in order for the deal to legally go through. These include: origination fees, title insurance, attorney fees, recording and transfer fees, and pre-pays.
Keeping the Home: Monthly Housing Expenses
Taken into account when determining monthly housing expenses are:
* Mortgage principal;
* Mortgage interest;
* Taxes;
* and Insurance.
This is commonly written as "PITI" for "Principal, Interest, Taxes, Insurance".
In the case of conventional loans, your monthly housing expenses should fall below 26-28% of your gross monthly income. For FHA mortgages, the qualifying ratio is 29%. If you carry any long term debt (that's expenses extending 11 months into the future or more), then the ratios change slightly. Conventional loans allow a maximum monthly housing expenses and long-term debt combined of 33-36% of gross monthly income; FHA loans allow a 41% maximum. These numbers reflect guidelines, however - not hard and fast rules. Each loan application is considered on an individual basis.
To figure out how much you should spend on a mortgage, you can do the same basic calculations. Make a simple comparison between your monthly income and your monthly long-term expenses and financial obligations. For the most accurate results, don't pad the numbers. Include only income that you can count on. And by the same token, don't exclude from your calculations any regular expenses, whatever they mortgage refinancing be.
Maintaining the Home: Maintenance Costs
It is also advisable to allow for the various expenses you don't have yet, but will once you own the refinancing mortgage you're trying to buy. For example, estimate your monthly maintenance costs (or estimate it annually and divide by 12). Not only do you want to make sure that you can afford to buy the home you want; you also want to ensure that you can afford to maintain and keep it. You can easily compile information on such maintenance expenses as utility costs by asking previous owners or residents to give you an average of what they spent.
Assistance Affording the Home
Low-to-moderate income households may qualify for several conventional and government programs that make home-buying more affordable and easier to achieve. With more lenient qualifications than comparable standard loans, many of these programs do require that applicants consent to financial counseling in order to be approved.
Somerset Mortgage Lenders has been in business since 1979. Whether you are looking to refinance your mortgage, consolidate your debt, improve your home, we can help.
Call us toll-free at 1-800-675-9783 or visit us online.
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