March 3rd, 2017 9:19 AM by Jackie A. Graves, President
According to the latest data from Trulia, the median selling price
for a home is $192,000. That's far more than most of us could afford to pay in
cash, and why most of us take out a mortgage. But don't rely on a lender to
tell you how
much of your monthly income you
can comfortably spend on your home. They may let you borrow the maximum
possible amount, but that doesn't mean you should — or must — take them up on
the offer. Crunch your own numbers first to determine how much money you can
put toward your mortgage each month before you start searching for homes for sale in Alexandria, VA, or Boston, MA.
1. Calculate your true monthly cost
If you want an in-depth look at your potential mortgage payment,
look for a mortgage calculator that includes costs like homeowners insurance or
property taxes. (You want more than just a sales price and loan interest rate.)
To figure this out, head to Trulia's
mortgage calculator and
click "advanced." Homeowners insurance and property taxes will be
part of the mortgage costs you pay each month. You may also need to add in PMI,
mortgage insurance, if you put less than 10% down on the purchase.
Your monthly insurance premiums and your property taxes will
depend on what you buy and where you live. When determining how much of your
monthly income you can spend on a mortgage payment, you need to add in both
these costs. To get an accurate estimate, call insurance providers for a quote
and look up property tax rates in the city or county you plan to buy in.
Know the legal limits on lenders
According to the Mortgage
Reform and Anti-Predatory Lending Act, a section of the Dodd-Frank
Act of 2010, any entity lending money for a mortgage cannot underwrite the loan
unless they determine you can reasonably repay it. That determination is based
on your credit, job history (and stability), and your income. By law, lenders
can't approve mortgages that would take up more than 35% of your monthly
income. And most lenders stick with even more stringent requirements, limiting
a mortgage payment to 28% of a borrower's monthly income.
3. Your mortgage should take up no more than
28% of your monthly income
You can use 28% as your rule of thumb too when making a budget for
buying a home. Here's an easy formula: Multiply your monthly income by 28, then
divide that by 100. The answer is 28% of your monthly income. The median income
in the U.S. is $55,775. If this were your income, you'd make about $4,648 per
month; 28% of that monthly income comes out to about $1,301.
That means you could spend $1,301 on a mortgage, maximum.
Remember, 28% is the top of the spectrum when it comes to how much of your
monthly income you should spend on your mortgage. Paying less means a smaller
strain on your budget.
It's a good benchmark, but this number doesn't necessarily take
your full financial picture into consideration. Consider subtracting other
essential expenses (such as child care or transportation costs) from your
monthly income total. In addition, your lender will also consider student
loans, a car loan, and credit
card debt. If that debt that represents more than about 7% of your
income, you may not qualify for a mortgage that costs 28% of your income. Your
total debt-to-income ratio can't exceed 35%, so you either need to pay off
existing debts first or borrow less money to buy a home.
By Trulia Contributor - To view the original article click here