Top 3 Guidelines to Decide Your Next Mortgage Payment
One of the questions I often hear from my clients is, How much house can I afford on my current salary? It’s a wise question, especially for homebuyers who want to build wealth and financial stability. When it comes down to it, every homebuyer wants a mortgage payment that fits their budget, their lifestyle, and their financial goals.
In short, most borrowers want a mortgage they can afford. In today’s culture, where life-work balance is growing more important, becoming house-poor is starting to lose its luster. No one wants to be strapped for cash for months after escrow closes.
Most mortgage lenders have specific criteria and guidelines to reduce risk. But sometimes, a mortgage lender will approve a home loan that has a mortgage payment beyond your comfort level.
If you’re ready to buy a home and want a mortgage that fits your budget and helps you build financial stability, this article can help.
How much of my income should go toward a mortgage?
Each financial situation is different, but here are some common guidelines. Many mortgage lenders use similar criteria to determine risk. That said, these guidelines are very helpful for homeowners who value financial stability. You can limit how much you want to borrow, even when a lender approves you for more.
Guideline #1: The 28% Rule
The 28% rule is a common guideline used by mortgage lenders and financial advisors. In short, this guideline suggests that 28% of your gross monthly income should be the maximum amount you put toward a mortgage payment.
The 28% rule is also referred to as the front-end ratio. To follow this guideline, determine your pre-tax monthly gross income, and multiply it by .28 — this gives you an estimate of your maximum monthly mortgage payment. Just remember, your total payment should include your mortgage payment (principal + interest), property taxes and homeowner’s insurance.
If you’d like to discuss your specific situation, please schedule a call or reach me directly at (408) 610-8011.
Guideline #2: The 36% Rule
The 36% rule compares your gross monthly income against your monthly debt obligations.
With this guideline, 36% of your pre-tax gross monthly income is the maximum amount recommended to meet monthly debt obligations. To determine your monthly debt payments, make sure to include credit card payments, auto loans, student loans and any other outstanding monthly debt payments.
When you add your debt commitments with your proposed monthly mortgage payment, the total should be 36% or less, based on your gross monthly income.
Staying within these limits typically means you’ll be able to put aside savings for home maintenance and unexpected expenses without being cash strapped.
Guideline #3: The 43% Debt-to-Income Ratio Rule
In general, mortgage lenders offer the lowest mortgage rates to borrowers with a DTI ratio of <36%. That said, qualified borrowers can often get approved for a mortgage with a DTI (debt-to-income) ratio up to 43%.
Just be sure to take a look at your financial picture. For example, if ~50% of your income goes toward your mortgage payment, you might carry unnecessary financial stress. If your financial situation changes or your employment shifts, you’ll still need to make your monthly mortgage payment. Also, borrowers with a higher DTI are often presented with higher rates and less favorable loan terms.
On the other hand, if you are at the start of your career and financial growth is probably, it might make sense to take on a mortgage that is a bit of a stretch.
If you’re wondering which path is better, we’d love to help. Feel free to reach me directly at (408) 610-8011 or schedule a call.
What’s Next
If you’re considering buying a new home, take some time to think about your financial future. And remember, you get to decide what you’re comfortable with when it comes to your mortgage payment. We work with homeowners throughout California, Oregon, Washington and Colorado. Our goal is to help you reach financial freedom and save money on your mortgage. Feel free to reach me directly at (408) 610-8011.
