The idea of getting a new home is exciting and marks a big change from being a renter to becoming a homeowner. It is easy for an individual or a couple to become caught up in the possibilities of owning a home without considering all the costs involved in home ownership.
Choosing the maximum amount that should be allowed for a new house mortgage is somewhat determined by your ability to become preapproved for a specific amount. This preapproval amount is set for a specific period of time, but it can change if you make big purchases, lose income or have other factors that impact your financial status prior to applying for the mortgage.
To make the calculations about how much home you can afford, which may be less than the preapproval amount, the following considerations are important.
Front and Back-End Ratio
The front-end ratio is the amount you can afford to pay on housing from your income before taxes. This includes the insurance, taxes, as well as principal and interest on the mortgage. The standard percentage is 28% of your before-taxes income.
The back-end ratio is the amount you can afford after taking into consideration all other debts. These other debts can include car notes, student loans and minimum payments on all credit card balances. This is added to the same home ownership costs, and it should not be more than 36% of your income.
Each case is different. Lenders may offer a new house mortgage to people well above these ratios, but this is done by reviewing credit history, down payment amount, debt to income ratio and other ongoing expenses.
Finally, keep in mind that having a home also means having money in reserve to make repairs, complete renovations or even complete home improvements. Mortgage companies often provide handy calculators to help you to determine the ideal level of your new house mortgage.
To learn more about what you can receive in a new house mortgage, talk to the experts at Guaranteed Rate. Additional information and calculators can be found at Guaranteed Rate.
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