Getting a mortgage and buying a real estate property are major financial moves for any family or investor. But striking the right balance between making a significant investment and maintaining your finances stable isn’t always easy.
After all, a larger mortgage might afford you a more valuable property, but it can also end up throwing your financial life off balance, which might have long-lasting consequences.
So, how can you be sure that you are using mortgage products correctly and to your advantage? Let’s start with the guide below.
Analyze Your Cash Flow
To know how high your mortgage repayments can be each month, you should start by looking at your current cash flow. The after-tax income your household perceives minus your monthly expenses can help you understand how much you can comfortably redirect towards your mortgage payments.
What’s more, assessing your personal cash flow can help you choose what kind of house to buy. Depending on your disposable income, saving, and downpayment availability, you might opt for a foreclosed home or a custom-made building.
Look at Your Debt to Income Ratio
Another aspect of your finances to look at to determine how much mortgage you can afford to repay each month is your debt-to-income (DTI) ratio. The debt-to-income ratio is an indicator that describes what percentage of your after-tax income is used towards repaying your existing debt each month.
Ideally, your DTI should be:
28% if not including your mortgage payments or;
36% including your mortgage payments
If your mortgage payments cause your DTI to grow higher, you should consider refinancing or choosing a mortgage with lower monthly payments.
Assess Your Credit History and Assets
How much mortgage you can afford is something that is commonly used by lenders during the pre-approval process. Traditional lenders will look at aspects such as your DTI, income, and job stability. But they will also look at your credit history and asset portfolio.
In particular, your credit score will impact how much mortgage you are eligible for, your interest rates, and how much you’ll have to repay each month. If you are looking to access more convenient mortgages, consider taking some time to build your credit score to at least 640 or 720.
Take a Hard Look at the Current Housing Market and Interest Rates
Although you can’t be certain of how much your mortgage repayments will be before you get pre-approved, there is a lot that you can do to get a rough estimation and set your expectations correctly. And, even more importantly, carrying out this due diligence can tell you whether this is the right time for you to buy a home!
According to estimations, in Q3 2022, homes in the US are sold for an average of $454,900, marking an all-time high. Additionally, the Fed is now increasing interest rates, causing the cost of borrowing to rise. In terms of inventory fluctuations, the US housing environment is still a seller’s market, but inventory is rising and demand has started to slow down.
As the market continues to change at an unprecedented rate, make sure to consult an experienced advisor before making a once-in-a-lifetime investment!
Working Out What Your Monthly Payments Will Be
The indicators above can offer a rough estimation of how much your mortgage repayments will be. However, if you are looking for a more accurate forecast, consider using tools such as the loanDepot’s calculator for home mortgage loans.
Using factors such as your salary, down payment, loan amount, home value, and financial history, these digital tools can help you obtain realistic estimations of the monthly expenses you’ll have to face once you have taken out a mortgage.
Get Pre-Approved by a Trusted Lender Before Shopping for a House!
Before scanning the market in search of the perfect home or property to invest in, make sure you get pre-approved by a reputable lender. This process might seem superfluous at first, but it can help you get a better idea of how much you can afford, how large your monthly payments will be, and what type of property you’ll be able to access based on your finances.
