A dream home is an ultimate goal for many people. After years of working hard, you want a place to call your own – a space that perfectly reflects your taste and style. It is an exciting time as you have imagined yourself and your family living in this home for years to come. But as you start to look for your dream home in Missouri and to make it a reality, you need to figure out how to pay for it. A mortgage loan is one way to finance your dream home. Mortgage lenders will give you a loan, and you will make monthly payments to the lender over time.
But before that, you need to ask yourself, “How much mortgage can you afford on your income?”
Here we have mapped out some steps to help the financial aspect that helps you set realistic expectations while you are searching for your dream home.
How Much Mortgage Can You Afford?
Review Your Income
Mortgage approval not only depends on the price of the home but also on your current income. Generally, gross income is your yearly salary before taxes and other deductions. Review your pay stubs from your employer to get a clear understanding of how much money you bring home each month. Calculate your gross monthly income depending on how often you get paid.
Annual Salary: If you earn a salary, divide the total amount by 12 to get your monthly gross income.
Hourly Wage:
- Start with the number of hours you work per week.
- Multiply this number by 52 (number of weeks in a year).
- Divide that particular number by 12 to get your monthly gross income.
Freelance or Commission: If you don’t have a regular paycheck, you can add up your earnings over the course of a year and divide by 12. If you only have a partial year of income, you can use that amount or calculate an average over the past few years.
Don’t forget to incorporate other sources of income, such as child support, alimony, or disability payments. You’ll need to provide this information to your mortgage lender in Missouri when you’re ready to apply for a mortgage.
Assess your debt
Additionally to your income, your mortgage lender will also consider your current debt when you’re applying for a mortgage loan. It includes credit cards, student loans, car payments, and any other type of monthly debt you may have.
Your lender will use a debt-to-income ratio (DTI) to help assess how much mortgage you can afford. This is the percentage of your monthly gross income that goes towards debt payments.
Front- End DTI
This ratio calculates your monthly mortgage payment as a percentage of your gross income. The monthly income rate that would go towards your housing payment includes principal, interest, taxes, and insurance (PITI). A good rule is to keep your front-end DTI at or below 28% of your monthly gross income.
Back- End DTI
The percentage of your monthly income would go towards all of your monthly debt obligations, including your housing, car payments, student loans, credit card debt, and any other monthly debt payments. Lenders will typically want to see a back-end DTI of 36% or less.
The 28/36 rule is a general guideline to assess how much mortgage you can afford. This means that no more than 28% of your gross monthly income should go towards your front-end DTI, and no more than 36% of your gross monthly income can go towards your back-end DTI.
Check your Credit Score
Your lender will take out your credit report and give you a credit score when you apply for a mortgage. This number is based on your credit history and helps lenders assess your creditworthiness.
A higher credit score means you’re more likely to get approved for a loan and could qualify for a lower interest rate. A lower credit score could turn into a higher interest rate, also known as APR (annual percentage rate).
The minimum credit score required for Missouri mortgage rates varies by lender, but you’ll typically need a score of 620 or higher to qualify. Maintain a good credit score by making on-time payments, paying off debt, and keeping your credit utilization low. Be sure to track your credit report and score so you can identify any potential red flags in advance of applying for a mortgage.
Calculate Your Down Payment
Your down payment is the amount of cash you put towards purchasing your home. The more money you can contribute as a down payment, the lower your loan amount and the monthly payment will be.
Lenders typically require a down payment of 3% to 20% of the purchase price, depending on your loan type. For example, you’ll need a higher down payment if you’re getting an FHA loan than if you’re using a conventional loan. So consider which type of mortgage is best for you before committing to a down payment amount.
Besides the amount of your down payment, lenders will also look to the number of years for which the mortgage loan is needed. A short-term loan has high monthly payments but a lower interest rate, while a long-term loan has lower monthly payments but a higher interest rate.
Pre-Mortgage Considerations
The lender’s criteria are important to understand, but there are other factors you should consider before applying for a mortgage.
Income
Be honest with yourself about your current and future income. Is your job secure? Do you expect a promotion or raise soon? If not, can you still afford the monthly payments if your income stays the same or decreases? If meeting your monthly budget is already tight, getting a mortgage may not be the best idea.
Expenses
In addition to your mortgage payments, you’ll also have to pay for property taxes, homeowners insurance, and potentially private mortgage insurance (PMI). So make sure you have a realistic understanding of all the associated costs before applying for a loan.
Lifestyle
Buying a home is a big commitment. Ask yourself if you’re ready to settle down and make the necessary changes to your lifestyle. If a few trips to the mall and tightening your budget sounds like torture, you may not be ready for homeownership. If you can’t adjust to your current lifestyle or have multiple credit card debts, you might want to play safe and take a conservative approach to purchasing a home.
Costs Beyond the Mortgage
While your mortgage payment is the largest bill you’ll pay as a homeowner, it’s not the only one. You’ll also be responsible for additional expenses that don’t go away even after you’ve paid off your mortgage. So keep the following in mind as you budget for your new home.
Property Taxes
In Missouri or most other states, you’ll have to pay an annual property tax. The amount is determined by the value of your home and the tax rate in your area. The tax is typically escrowed into your monthly mortgage payment, but you’ll still need to budget for it annually.
Homeowners Insurance
Homeowners insurance protects you from financial loss if your home is damaged or destroyed by a covered event, such as a fire. Most mortgage lenders want you to have insurance, and they may even specify the minimum amount of coverage you must carry.
Most mortgage companies won’t let you purchase a home without homeowners insurance. You need to show them proof of insurance before your loan will be funded.
Maintenance and Repairs
It doesn’t matter if your house is new or old; things will break. You need to be prepared to pay for repairs and maintenance from a leaky faucet to a broken furnace. Some homeowners set aside money each month to cover these costs, while others wait until an emergency arises.
Utilities
You’ll also be responsible for the monthly costs of running your homes, such as electricity, gas, water, and trash service. These costs can vary greatly depending on the size of your home, the climate where you live, and your family’s consumption habits. These expenses are not included in the front-end or back-end ratios, so make sure you factor them into your budget. They are unavoidable costs of homeownership.
Association Fees
Many neighborhoods have homeowner’s associations (HOA) that collect monthly or annual fees. These fees go toward the upkeep of common areas, like lawn maintenance, playgrounds, and swimming pools. Some fees also cover trash pick-up, security, and building insurance. If you’re considering a home in a planned development or gated community, make sure you’re aware of the associated fees.
Furniture and Decor
Before you purchase a home, you need to furnish it. Unless you’re inheriting furniture or plan on buying everything new, you’ll need to factor in the cost of buying or moving your current furniture. You should also plan on purchasing new items, like window treatments, rugs, and towels.
The Bottom Line
Make sure to factor in all the costs of homeownership, from property taxes to monthly utility bills, before making an offer on a home. It’s also important to remember that your financial situation may change, and you need to be prepared for that. If you’re not sure how much house you can afford, it’s better to err on the side of caution and buy a home that’s within your budget. Mortgage lender will give you a pre-approval letter that states how much they’re willing to lend you, but that doesn’t mean you have to spend the entire amount.
