CTips2_HomeAffordability

Chad Wisnant from Midtown Mortgage discusses how much house you can afford. Your mortgage loan qualification depends on your debt-to-income ratio (DTI). The 29/41 rule suggests that your housing expense ratio should be no more than 29% of your gross monthly income, and your total DTI should be no more than 41%. Factors such as mortgage term and rate, down payment, homeowner's insurance, property taxes, and closing costs also impact affordability. It's important to create a budget and consider your savings and assets. Higher down payments can lead to lower interest rates and no mortgage insurance. Closing costs typically range from 3% to 6% of the home purchase price. Hey everyone, it's Chad Wisnant with Midtown Mortgage. One of the questions that I'm often asked is, Chad, how much house can I afford? So let's talk about that today on Chad's Tips. How much of a mortgage loan you can qualify for depends on how much debt a lender thinks you can take on. This will ultimately decide how much house you're able to afford. However, just because you're approved for a certain amount doesn't mean you should buy a house that costs that much. Instead, you'll want to take a deep look at how much house you can afford and set a firm budget once you begin your home search. Buying a house is a huge undertaking and it's easy to get wrapped up in the excitement of it all. But that excitement shouldn't overshadow your awareness of your home buying budget. It's crucial to be realistic about what you can afford, especially as the intensity of buyer demand in today's housing market drives asking prices higher and higher. You'll want to hunt for homes that are in your price range so you don't fall in love with a house that's simply out of reach. Knowing your budget and sticking to it will make the home buying process run smoothly. If you check out our website, midtownmort.com, we have a great home affordability calculator that gives you the option to see how much house you can afford or how much cash you need for your down payment and closing costs. You just enter in your location, yearly income, your monthly debts, and how much money you have for a down payment and closing cost, and the calculator will take this information and tell you how big of a loan you can safely take on. On the flip side, if you have a price in mind, you can use the calculator to see how much cash you'll need for a down payment and closing cost. So whenever we evaluate a mortgage application, we calculate your debt to income ratio. You may hear us call it or refer to it as your DTI. This is your monthly debt payments divided by your monthly gross income. We look at this number to see how much additional debt you can take on. According to the 2941 rule of thumb, it's best to keep your DTI within a range that's defined by these two numbers. Here's an example. The first number that I mentioned, 29, represents your housing expense ratio. This is calculated by dividing your mortgage payment, which consists of principal, interest, property taxes, homeowner's insurance, and, if affable, homeowner's association dues and mortgage insurance, into your gross monthly income and converting it into a percentage. It's defined by this formula, principal plus interest plus property taxes plus insurance plus homeowner's association dues divided by 100. The 41 represents the total DTI after all your other debts are added, including revolving debt such as credit cards and other lines of credit and installment debt such as mortgage, car payment, student loans, and personal loans. The 2941 rule is important to know when thinking about your mortgage qualification because DTI helps lenders determine your ability to pay your mortgage. Although higher monthly expense and DTI ratios are allowed under many loan types, including conventional FHA, USDA, and VA loans, the 2941 rule provides a good starting point. You'll need to calculate how much house you can afford while considering a wide range of loan options. Make sure your mortgage payment is no more than 29% of your gross monthly income. Also, make sure that your total monthly debt is no more than 41% of your total monthly income. Mortgage lenders consider DTI an important qualifying factor. The amount of debt you have is considered to be a very reliable predictor of the risk associated with the approval of any mortgage loan. Therefore, it's important to know your numbers. So let's look at how DTI is calculated one more time. Add up all of your monthly debts. Your monthly payments could include monthly child support payments or alimony, student loan payments, car payments, monthly credit card minimum payments, and any other debts that you might have that are reporting to your credit reports. You don't need to add in grocery bills, utility bills, taxes, or any other bills that may vary month to month and would not appear on your credit reports. The second step is divide your monthly debts by your monthly gross income. So let's do a simple calculation. For example, let's say your debts add up to $2,000 per month. If your monthly gross income, your before-tax income, is $6,000 per month, then your debt-to-income ratio, your DTI, is .33 or 33%. Although your DTI and housing expense ratios are important factors in mortgage qualification, there are other things that impact your monthly mortgage payment and how much you can afford. Here are several factors to keep in mind before you hit the pavement looking for a new home. Mortgage term. Mortgage term refers to the length of time you have to pay back the amount you borrowed. The most common loan terms are 15 and 30 years, though there are other terms available. Your mortgage term impacts your monthly payments. The longer the loan term is, the smaller your monthly payments will likely be. Here's an example. If you buy a $200,000 house with a 15-year fixed-rate mortgage at 4%, your monthly payments are $1,469.37. That excludes taxes and insurance. Let's change the term. Let's say you buy a $200,000 house at 4%, but the term is 30 years. Your monthly payments are $943.34, excluding taxes and insurance. See how that works? Once you close on your home loan, your monthly mortgage payment may well be the biggest debt payment you make each month, so it's important to make sure you can afford it. Along with the down payment, this is probably one of the two biggest factors that determine how much you can afford. Here's another term. Mortgage rate. Mortgage rate refers to the interest rate on your mortgage. Mortgage rates are determined by your lender and can be fixed or adjustable. This means they can stay the same or change over the life of the loan. Your rate can vary depending on your credit score, down payment, and other factors. Say you bought the same $200,000 house as above with a 15-year fixed mortgage at 4%. But we changed the monthly mortgage interest rate to 4.25% instead. Your payment would go up from $1,469 a month to $1,504 per month. Even a small difference in interest rates could mean hundreds or even thousands of dollars difference in interest paid over the life of the loan. Interest rates also affect your overall monthly payment, which has the biggest direct impact on affordability. So now that we've looked at your DTI and any debts you may have, think about your budget. How does a monthly mortgage payment fit in? If you don't have a budget, keep track of your income and expenses for a couple of months. You can create a personal budget spreadsheet or use a number of budgeting apps or online budgeting tools. In the mortgage process, it's important to look at your budget, savings, and assets for a couple of reasons. For one thing, you might need savings for a down payment. You might think that you need to plump down 20% of your purchase price for a down payment. That's not actually true. You can get a conventional loan or a loan backed by Fannie Mae or Freddie Mac for as little as 3% down. That's not to say there aren't advantages to a higher down payment. For example, you may see the following benefits by increasing the amount you put down on your home. Lower interest rates. Interest rates are decided on two factors, down payment and median FICO score. The higher your down payment is, the better your interest rate will be. If a lender doesn't have to loan as much money, the investment is considered a better risk. There's also no mortgage insurance. If you put down less than 20%, you'll likely have to pay for mortgage insurance, which can involve a monthly fee as well as an upfront fee, depending on the loan option that you qualify for. Mortgage insurance protects your lender and the mortgage investor if you don't make payments in default on your loan. But that insurance can significantly increase how much you'll spend each month on your mortgage. As you determine how much house you can afford, remember to factor in down payments, especially if you're trying to afford the 20% to avoid PMI. Please take note that you might not have to put anything down at all if you qualify for certain government loans. In addition to the cost of your down payment in any private mortgage insurance, you'll also need to consider homeowner's insurance taxes and closing costs. Homeowner's insurance depends on where you live. The amount that you need depends upon where you live, your neighborhood, and the type of property that you buy. Homeowner's insurance calculations also consider the value of your property, potential rebuild costs, and the value of your at-risk assets. It's best to call an insurance agent to get an idea of what your homeowner's insurance amounts could be. If you own property, you pay property taxes, which amounts to your property's assessed value multiplied by the local tax rate. You can ask your local tax assessor for more information regarding that. Let's not forget closing costs. Closing costs must be paid during closing, the last step in the home buying process. Your lender will give you an estimate of your closing costs. These include any possible loan origination fees, appraisal fees, title search fees, credit report charges, and more. Typical closing costs in the home purchase can be anywhere from 3% to 6%. Thanks for listening today, and I look forward to talking with you again soon.