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Will Your Mortgage Fit in Your Wallet?

November 13th, 2014 8:20 AM by Jackie A. Graves

your mortgage

First-time home buyers who plan to apply for a mortgage have to consider how much loan they can afford. Excess debt can affect your ability to own a home, both on a practical and emotional level.

So before you go shopping for a mortgage, determine your debt level first to make a responsible decision on the purchase of your first house.

Calculate Your Debt-to-Income Ratio

Lenders will use your debt-to-income ratio to determine how much you qualify for.

To prep yourself, run a quick back-of-the-napkin calculation: Divide the total of your fixed expenses—such as rent, car loans and child support—by your gross monthly income. While this ratio isn’t a full picture of your true spending ability, it’s a starting point.

Know What the Lender Wants

Most modern mortgages are qualified mortgages.

These mortgages have standardized terms that put a cap on your debt-to-income ratio. If you apply for a qualified mortgage, your debts—including your mortgage payment—can’t exceed 43% of your monthly income.

If you’re carrying a high level of debt, you may need to reduce your obligations before you can qualify for the mortgage you want.

Ask Yourself What You Can Truly Afford

While you may qualify for a high-dollar mortgage, borrowing the full amount you’re eligible to receive may not be the right idea.

First, consider your cash reserves. Closing costs usually equal 2% to 3% of the house price. Once you’ve made a down payment and paid closing costs, your savings can be depleted. If you don’t have enough cash reserves to cover these costs and leave an emergency fund in the bank, consider a smaller mortgage.

You also need to leave yourself wiggle room in your monthly budget. If your monthly mortgage payment swallows up most of your monthly income, you could quickly get into trouble.®’s Home Affordability Calculator can help you see what your mortgage and monthly expenses may look like.

Accurately Assess Your Stress Tolerance

People handle income and debts differently. While some people can white-knuckle through a tight budget, others will feel overwhelmed.

Before taking out a mortgage and adding to your monthly debt obligations, test the waters. Pretend to make a monthly mortgage payment and set aside the additional amount you’d pay each month.

If you feel comfortable living with the remaining amount, you’re ready to buy a house. If that additional payment leaves you feeling stressed and unable to live within your means, you have too much debt to take on your mortgage.

 By: Angela Colley |Updated from an earlier version by Gilan Gertz. 

To view the original article click here

Posted by Jackie A. Graves on November 13th, 2014 8:20 AM


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