Securing an affordable mortgage is possible, as long as you know where to look. Once you find a house and make an offer, the next step is financing the purchase with a loan that you can handle. If you find yourself asking “What price house can I afford?” you may not be quite ready to secure a mortgage. But if you already have a budget and have found a house listed under that amount, it’s time to finalize the sale with a mortgage.
Most homebuyers are not financially equipped to pay the full price of a home up front. That’s where a mortgage comes into play – it’s a loan used to finance the cost of a home. Mortgage lenders provide most (sometimes all) of the money necessary to purchase a home, while borrowers make smaller monthly payments over time to repay the loan.
Calculating mortgage affordability requires you to know a bit more about the types of mortgages that exist. Some mortgages are issued in 15-year terms, while others are repaid over 30 years.
Likewise, loans may have different interest rates, which is money paid to the lender in exchange for providing the upfront funding for the purchase of a home. Mortgage rates vary depending on many factors and often fluctuate depending on the type of mortgage you choose.
Getting a cheap mortgage rate is one way to lower your mortgage payment. The lower the rate, the less money you will be paying in interest to the lender.
There are a few factors that affect mortgage interest rates, such as:
· Your credit. Mortgage lenders analyze your credit score to determine how much of a risk you present as a borrower. The higher your score, the less of a risk the lender is taking to lend you money.
· The mortgage lender. Mortgage lenders may have different policies or criteria for determining how much influence a credit score has over the mortgage rate.
· The housing market. Mortgage rates are impacted by the health of the economy and the housing market.
When comparing mortgage rates, it is common to see lower rates among 15-year mortgages than 30-year mortgages. The difference in loan terms translates to higher risk; the lender must wait an extra 15 years to collect all the money from the borrower, which is 15 more years that the borrower could potentially stop making payments.
The average mortgage interest rates in 2022 were extremely low. In fact, the last several years have broken many records for low rates in the U.S. However, rates are on the rise in. 2023, and currently, 30-year mortgage rates are around 7.1%, while rates for 15-year mortgages can be as low as 5.98%.
Another step in finding an affordable mortgage is to analyze your financial situation. It is important to determine how much you can afford to pay on your monthly mortgage bill to avoid overspending. Mortgage lenders may calculate affordability a bit differently; however, there are a few standard measures you can use to estimate your financial capability.
Calculating mortgage affordability can be done by finding your debt-to-income ratio, or DTI. This is an expression of your debt compared to your income. Most mortgage lenders recommend spending no more than 28% of your monthly income on your mortgage, and no more than 36% of your monthly income on debt in general.
You can calculate your DTI by totaling all your sources of debt (excluding any housing or living costs). Then, total all your sources of income. Once you have both figures, divide your debt by your income to arrive at your DTI, which is expressed as a percentage.
Once you know your DTI, you can begin calculating mortgage payment assessments to help determine your maximum monthly bill. Mortgage lenders may approve you for a loan that is even larger than the home price you can afford. If you do not take some time to calculate your expected payments, you could overspend and risk foreclosure.
If you are wondering “what mortgage can I afford?” there are a few factors to consider that can help you stay within your budget.
Mortgage lenders typically calculate home affordability by placing home prices into three categories. These are:
The affordable mortgage category includes home prices that work with your current financial situation. Most mortgage lenders consider a DTI of 34% or less a good measure of an “affordable” home price range. In most cases, you would not need to change your spending or saving habits significantly to afford homes in this category.
The “stretch” category includes home prices that you may be able to afford but would need to make several changes to your spending and saving habits to make your payments. Lenders consider a DTI between 35 and 41% to be a “stretch” mortgage.
A home price that raises your DTI to 42% or higher is considered an “aggressive” mortgage. To afford this mortgage, you would need to make major financial adjustments to your income and spending to make your payments.
If calculating mortgage affordability doesn’t prove to be helpful, it may help to take some time to work on your finances before buying a home. There are several things you can do to prepare for the homebuying process that can improve your chances of finding an affordable financing option.
For example, securing good mortgage rates may require you to have a better credit score. You may not qualify for a cheap mortgage rate if your credit score is below 600. It could take several months (even years) to rebuild your credit, but it could translate into a much lower rate, therefore a more affordable monthly mortgage payment.
Finding affordable mortgage options may be easier if you can put more money toward a down payment, which is money you pay before financing a loan. The higher your down payment, the less money you need to finance.
Most conventional (traditional) loans require a down payment of 20% of the purchase price. However, you may qualify for other types of loans that could lower your down payment to just 3.5%. Some loans even waive the down payment requirement.