Mortgage Guideline

There are many types of different loans, and even more personal finance situations. So what is a mortgage and it’s mortgage rate? Here is our complete guide to begin your journey into the successful homeowner’s world.

What Mortgage Can I Qualify For?

A mortgage loan amount is based on the following three things:

  • Down payment or the amount you can initially pay in cash.
  • Your credit rating.
  • Proof of consistent income, proving you can make the monthly payments.

How much is required for a downpayment on a house in 2019 varies mainly on the three things listed above. Lenders will analyze a potential borrower’s overall household income and their debt to income ratio.

So for example, if you are wondering to yourself, “What mortgage can I afford with 100k salary?”, here’s the quickest breakdown for you:

Take your household income and multiply it by 4. So a $100,000 income can roughly afford a $400,000 house.

You can guestimate your monthly payment will go up about $600 for every $100,000 the house is valued at.

To get a more exact estimate, property taxes, homeowners insurance, and the average value in the area will have to be calculated in. By using your zip code to find the average cost in the area of interest, you can get exact numbers calculated online and through your lender.

Generally, one is better off purchasing their own mortgage insurance privately, as it is almost always cheaper to purchase mortgage insurance through some other institution rather than your bank at the time of mortgage. The savings can often be more than $100 per month.

Mortgage Loan GuidelineMortgage rates can either be locked in at the time you sign your mortgage papers, or you can pay your mortgage rate year to year, meaning the price can change depending on the economy.

The benefit of locking in is knowing exactly how much interest you will be paying each month, and to avoid any potential of the current economy crashing – and therefore raising interest rates.

The benefits of not locking into a mortgage rate are hoping or analyzing that the current economy will create lower interest prices.

How Much of My Income Should I Spend on Mortgages?

Mortgage defaults are all too common, even with the calculations done by lenders. Making sure you don’t fall into that category should be your top priority, even before finding your “perfect home” or a great “investment property”.

Here are some budgeting techniques to help you lay out a feasible mortgage plan based on your household income.

Do You Know the 50/30/20 Rule?

Also known as the 50/20/30 Rule, this popular personal budget recommends:

  • Spending 50% of your income on necessities like a mortgage.
  • Spending no more than 30% on wants.
  • Spending 20% on savings and debt repayment.

Mortgage Loan GuidelineThe simplicity of this plan enables debt control while still giving your family occasional indulgences and spending.

Your needs should be covered by 50% of your income after tax deduction. These needs are your mortgage payments and other living essentials like utilities, transportation, and groceries.

When a mortgage is added, remember to add your new home insurance and property taxes to this 50%. Americans on average pay around $1,000 insuring their homes, and about $2,000 on property taxes per year. If you are passing the 50% mark, you may have to revisit your wants.

30% of your income should cater to your wants, which is sometimes difficult to differentiate from your needs. Wants include shopping or eating out, travel and entertainment, or discretionary extracurriculars.

While 20% of your savings should ideally be put away for unexpected events, you may start with $500 to cover small emergencies and work your way up to a couple months worth of savings. This is also a good budgeting technique to work on getting rid of any debt, such as high-interest credit cards.

This 20% also goes towards saving for retirement. Buying a home and therefore paying a mortgage seems like an investment in your future and saving money, but keep in mind this 20% should not cover any house payments or basic necessities.

If you lose your job, your 20% savings will ideally cover your mortgage and necessities until you are back on your feet. If you are still in a rut paying your mortgage, you can consider refinancing your loan.

Do You Know the 28/36 Rule?

The 28/36 Rule calculates the amount of debt that you and your household should take on. This rule is also used by mortgage lenders to assess ones borrowing capacity.

This budgeting calculation rules that each household should spend no more than 28% of its monthly income on housing expenses. Similarly, the same household should spend no more than 36% on total debt repayment, from anything from your car loan to student loans.

  • Maximum of 28% of income on housing expenses.
  • Maximum of 36% on debt services.
  • The remaining 36% on savings and wants etc.

Because a mortgage is considered a debt, lenders consider any debt loads found outside the 28% and 36% parameters to be unrealistic for an average American to repay – potentially leading to a default.

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