Whether you are buying the house for the first time or not, affordability is something you need to keep an eye on. Budget becomes a deciding factor when you approach a broker or an agent in regards to buying a house. So what you can afford doesn’t merely depend on what the bank is willing to give you credit for. It is a bit more complex than that one. It is a general guide that your loan amount shall not exceed two to two and a half times your annual income. However, this is a general guideline. It goes beyond that.
Factors affecting how much house mortgage you can afford
Income
Your income is the main factor that decides how much is your capacity to repay the house mortgage you have taken.
Cash Reserve
Down payment is to be made while purchasing a house, and hence you will require to utilize cash reserves. Your cash reserves can help you make a higher down payment and spare your loan portion.
Debt and Expenses
Apart from house debt, other debts are also to be repaid. This may include student loans, car loans, and many others. All these affect your capacity to repay the housing loan taken.
Lifestyle
Your lifestyle is affected the most when you take up an additional mortgage. You may have to compromise on a few movie and shopping mall visits as the expense has gone up with a new mortgage.
Personality
Personality influences your capacity to take up a debt. If your personality is such that you get insomnia even if you owe a few bucks to someone, then it is definitely not meant for you.
- Mortgage rate
Higher the mortgage rate lower has to be the amount of mortgage as it increases the total cost of your house over a period of years.
The 28/36 rule in relation to monthly income
There is a general rule that states that your total expense in relation to housing shall not exceed 28% of your total monthly income. This expense includes mortgage, house owner’s insurance, private mortgage insurance.
Also, the total expense going towards repayment of debts from your total monthly income shall not exceed 36% of your total monthly income. This includes your credit card payments, student loans, car loans, and other debts.
For example: if Mr. Mike has a monthly income of $50000 and his wife earns $35000 every month, so they together make $85000 every month. So the expense they can have towards the house is $23800 [85000 x 28/100]. Their credit card bill approximates to $12000 every month, but the maximum expense they can have towards all of their debts is $30600 [85000 x 36/100]. So here, they either need to keep their credit card bill under control or take a loan that has repayment every month only up to $18600 [30600-12000]
Now, these limits are ideal as per the rule, but they can be higher or lower as per your risk-taking appetite and requirements.
Other points to be considered
- It is important to see that your routine expenses are also kept under check. Otherwise, it may happen that while you monitor all debt-related costs, regular expenses like groceries and utilities hit rocket high and affect your planning adversely.
- It is better to have a pre-approved loan over a pre-qualified loan. Pre-qualified loans only see if it fits debt to income ratio, while pre-approved loans verify all factors and then check the amount available to you.
- Don’t forget the insurance payments you need to make for the house. Also, consider the legal costs, stamp duty charges to be paid, brokerage, transfer expenses, etc.
- Compare the prices from at least three offerings to decide on which one to opt for. It shall not happen that you opt for something that is over-hyped and similar options are available at affordable values.
- It is advisable to have a few months of repayment as a cash reserve. This can help in times of adversities and contingencies.
These are ideal situations given, and it is not at all compulsory to work according to these ratios. However, they are worked up keeping some important aspects while calculating those and hence it is in your own good if you can work your best working near to these.
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