A bank or mortgage lender will help you determine a number for your loan affordability. Many are hoping for that number to as high as possible. But really, is this number a safe and comfortable amount of mortgage loan debt for you?
Real estate has traditionally been a fairly safe investment. Generally, a real estate investment will hold value and even accrue small increases from year to year. The value usually increases at a rate close to the annual rate of inflation.
Last year when the financial crisis of 2008 hit; real estate investments became less of a sure thing. There have been drops in some real estate market areas up to double digits of percentages. Additionally, increased job loss has made it difficult for many to keep up with their mortgage payments. Foreclosures have hit record highs in some communities.
Still, there are many who desire to take advantage of lower home price sales and many who interested in buying their first home, upgrading to a larger home or newer neighborhood or even downsizing as they reach new seasons in life.
A bank or mortgage lender will help you determine a number for your loan affordability. Many are hoping for that number to as high as possible. But really, is this number a safe and comfortable amount of mortgage loan debt for you? A new home is exciting and it’s easy to be tempted to take on a mortgage loan to get just the house you wanted. First it is important to understand how lenders come up with a number for mortgage loan debt for you and second to consider, even if you qualify, is how comfortably can you live while paying this mortgage?
How Do Lenders Determine Mortgage Loan Affordability?
There are tweaks from lender to lender but most mortgage lenders apply a 28/36 rule.
The 28% means that your mortgage payments as well as property taxes and insurance shouldn’t total more than 28% of your gross pay. Yes, that’s gross pay, as opposed to net pay.
The 36% means that the monthly outflow that includes the items listed above plus installment debts cannot equal more that 36% of your gross pay.
What would this look like? Let’s look at an example:
Household income: $84,000
Monthly installments: $500.00 (may include car payments, personal loans, or credit cards)
In this case a qualifying mortgage would be around $1,960.00.
Of course this would also be subject to a credit rating of average of better.
In the midst of this economic crisis, some lenders are adjusting this 28/36 rule by a few points or even requiring more money down. Some may want to know about portfolios that can be used as collateral.
Regardless of what a bank or mortgage lender will approve, where should you personally draw the mortgage payment line?
Do you really want to take on the maximum loan you qualify?
Points to Ponder:
A higher mortgage payment will also mean higher taxes, higher homeowner’s insurance, higher monthly maintenance and last but not least, less remaining cash each month.
Questions to Consider:
Will this mortgage loan leave any room for paying off other debts?
Will this mortgage leave any cash for saving for retirement?
Will this mortgage leave enough money left over to save for college?
Will this mortgage leave any money for traveling and vacations?
Often by choosing a mortgage loan below the one you qualify for you will leave more flexibility for emergencies, for savings and to enjoy your lifestyle.