How much of your monthly income should go toward your monthly mortgage payment? This guide explains.
When lenders look at your financial picture, they want to see your debt-to-income ratio, or DTI. This number tells them how much money you make compared to how much you pay in recurring monthly debt. (Your DTI is calculated by dividing your monthly pay before taxes by your total amount of monthly debt.)
Your recurring monthly debt may include things like:
- Personal loans
- Credit card minimum payments
- Student loans
- Car loans
- Personal lines of credit with credit unions, banks or other lenders
- Child support payments
- Alimony payments
Most lenders believe that people can afford to spend as much as 28 percent of their gross (before taxes) monthly income on a mortgage, and up to 36 percent of it on debt payments. If you fall into those brackets, you’re more likely to be approved for a mortgage; if you fall outside them, you may still be approved, but you may have to pay extra fees and a higher interest rate. That means your mortgage will cost you more money in the long run.
Related: What is an FHA first-time homebuyer loan?
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…But How Much Can You Comfortably Spend?
Just because you can afford a mortgage doesn’t mean you need to use all of what a lender is offering you. For example, if you qualify for a $750,000 home loan, there’s nothing stopping you from buying a home that costs half that.
Related: Glossary of real estate terms
How Does Your Down Payment Factor In?
When you come up with money for a down payment, that’s less that you have to borrow from a lender. For example, if you have $50,000 stashed away for a down payment on your next house, and the home you want costs $250,000, you only need to borrow $200,000 from a lender to make the purchase.
The other benefit to saving up a down payment is this: People who put their own money into a purchase generally qualify for more competitive interest rates. That’s because lenders see that they have some proverbial “skin in the game,” which means they’re statistically less likely to walk away from a mortgage if times get tough.
Do You Really Need 20 Percent Down to Buy a Home?
Although conventional wisdom says you should come up with a 20 percent down payment for a house, the truth is that you don’t really need that much.
The more money you put down on your home, the better, though. You’ll have lower monthly payments and likely qualify for more favorable rates and terms if you have a 20 percent down payment. If you can’t come up with 20 percent, there are loan products that you may qualify for – but bear in mind that you’ll have to pay for private mortgage insurance, or PMI, until you’ve built 20 percent equity in the home. (One exception to that rule is the VA loan, which forbids lenders from making you pay for PMI.)
Are You Buying or Selling a Home in Midland, Texas?
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