November 13th, 2014 8:20 AM by Jackie A. Graves, President
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
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.
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
By: Angela Colley |Updated from an earlier version by Gilan
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