How to Get the Best Mortgage Series – Week 2

Follow this series to learn how to get the best mortgage for your specific financial situation and goals. 

How it boils down is what you can afford each month before you determine a price range! 

As discussed last week, you need this amount so your lender can work backward to determine a correlating sales price. 

Your first step is to look at your monthly budget, which will help determine what your monthly mortgage payment should be. Then they can pre-approve you for an amount you’re comfortable with (and not necessarily a higher amount they say you can afford).

• Remember, it’s not helpful to know WHAT you qualify for (FYI lenders can qualify you for more than you want!). 

• It’s helpful to know what YOU WANT to qualify for and what those numbers look like—both your potential monthly payments along with down-payment requirements. 

This way, you’ll look at homes that are in the price range that you are most comfortable with.

Budgeting 101

Knowing where your money goes each month and how much you spend is really a basic financial must-do whether you own a home or are still renting. If you’ve never really sat down to do create a monthly budget, now is the time to put these numbers down.  Use this free resource if you need help getting started budgeting.

Ask yourself these two important questions:

Where does your money go now each month? How much is going to rent, to food, to travel, car, gym, etc.?  What expenses could you tighten-up on to get the home you want?

What expenses are “mandatory” for your life and general happiness?  For example, if you love to travel, then don’t buy a home that makes it impossible to go on a trip for years!  That would not be worth it.  But, if you rarely drive your car and are willing to take mass transit, then that’s where you could cut some of your monthly expenses to buy a home in the location you want.

Making a budget is an important step, so be honest about what you spend your money on each month now, what you’re willing to forego, and what you expect to in the future. Live comfortably under your means 😉

Yes, your salary will increase but you’ll have new costs, such as kids or a new car, which could mean daycare and higher car payments each month. Factor in all of this when doing your calculations.

Break It Down

Here’s what to include in your housing expenses. You’ll need to estimate some of these numbers and we can help you with that.

•List all the costs of homeownership — property taxes, mortgage insurance, home insurance, maintenance, utilities, hoa fees, etc. I can help with estimates!

•List all other expenses you expect to continue — such as gym memberships, day care payments, car loans, school loans, gas or commuting fees, etc.

•Estimate yearly maintenance costs for a home. Plan to spend or save about 1% of your home’s purchase price each year.  So, if you buy a $300,000 condo, you should be putting about $3,000 per year into the home for maintenance or into a savings account for when you need to replace something in the future! This also depends on the age of the home. For new or newer construction, you could back off of this amount.

• Include any tax advantages you’ll get as a homeowner.  You’ll have deductions or equity in your home and can potentially expect a larger refund that could go toward your savings.

As a home buyer, it’s also important to consider additional expenses, beyond your mortgage payment, that can impact how much home you can afford.

Mortgage Math “Rules of Thumb” to Consider

Here’s some additional guidance or “rules of thumb” that many experts suggest to buyers when determining how much they can afford comfortably. These guides are merely a starting point.

Do not let your mortgage payment force you into living paycheck to paycheck. IT IS NOT WORTH IT.

Buying a home priced two to three times your gross income is considered within the affordable range. If you earn $80,000 per year, you should be able to afford a home between $160,000 and $240,000. You can add these numbers to the amount of down payment you plan to use and voila, that’s about what you “should” use as your purchase price.

 You can afford 30% more in mortgage versus your current rent without changing your lifestyle.  To figure this out, multiply your current rent by 1.33 to arrive at a mortgage payment that won’t bust your budget. For example, if you currently pay $1,500 per month in rent, you should be able to comfortably afford a $2,000 monthly mortgage payment after factoring in the tax benefits of homeownership.  Of, course, everyone’s tax situation is different, so be sure to take to your licensed CPA to see how homeownership will impact your particular taxes. 

• Factoring in the 30/45 debt rule that lenders use can help you calculate how much new debt you can take on. For example, your entire monthly mortgage payments — home loan principal, interest, taxes, and insurance — shouldn’t total more than 30% of your gross annual income. And, your total debt shouldn’t exceed 45% of your income. This total debt includes your new monthly payments plus all your other bills, like car loans, utilities, and credit cards. In areas that have a high cost of living, these numbers tend to trend up towards 35-40% of your monthly income going to housing. But that’s really pushing it, so don’t go any higher no matter what!

Let’s use the 30/45 rule to show you how the math works. If your gross annual income is $80,000, multiply it by 30% and then divide by 12 months to arrive at a monthly mortgage payment of $2,000 or less. Next, check the total of all your monthly bills including your potential mortgage and make sure they don’t top 45% of your income, or $3,000 for this example.

I’m Here to Help

If you have any questions about calculating a monthly budget, please contact me. It’s an important step before you start looking at homes. Once you know your monthly budget, you’ll be able to work with the lender to determine your price range, which will then help you finalize your mortgage product and down payment options.

Stay tuned!  The next post iss the third installment of the How to Get the Best Mortgage series and will cover the topic, How Much You Need for a Down Payment.