Homeownership is a dream for many people, but some take on more debt than they should. If you’re thinking about buying a house, consider your income and current and potential expenses.
How Mortgage Lenders Decide How Much Applicants Can Afford
Lenders look at the total gross income of all individuals applying for a mortgage. This can include income from work, alimony, child support, disability benefits and Social Security.
Lenders typically allow borrowers to devote 28 percent of gross income to pay for a mortgage and associated costs, including taxes and insurance. Some lenders accept higher percentages. Where you live and your credit score will affect your interest rate, taxes and insurance premiums.
Lenders also consider applicants’ debt-to-income ratios. Debt can include loans, credit card balances, child support and other recurring monthly bills. Mortgage lenders generally want applicants to have a debt-to-income ratio at or below 36 percent of their monthly gross income.
The amount of a down payment affects the total amount borrowed. Many lenders require 20 percent, but some accept much lower down payments.
Don’t Borrow Too Much
A lender may approve you for a large mortgage because your situation looks good on paper, but that doesn’t necessarily mean you should borrow the full amount. You could face other expenses and lifestyle changes in the future.
Companies can lay off workers, restructure or go out of business at any time. Ask yourself if you would be able to find another job in your field with a comparable or higher salary in your area in a short period of time.
If you buy an older home or one that has not been well maintained, you might encounter a host of expensive problems. Appliances can break, a roof can leak, a foundation can crumble and pipes can burst. It would be better to borrow less than the lender approves you for and set aside money each month to cover repairs that will inevitably be needed.
If you have or plan to have children, consider all the potential expenses associated with raising and educating them. Even in the best of circumstances, raising kids is expensive. If a child has medical needs, you could face high bills and might be unable to continue working full-time. If you want to contribute to your children’s college education, factor that into your budget.
Don’t devote so much of your monthly income to your mortgage that you can’t afford to save for retirement. That could leave you with a big house that is paid off, but not enough money to cover food, medical expenses, maintenance and utilities when you are a senior citizen.
Proceed With Caution
When going through the exciting process of searching for a home, it’s easy to get carried away. You might fall in love with a house, but you need to keep a firm grip on reality. Consider possible future expenses and life changes and play it safe to avoid getting in over your head.
This article is intended for informational purposes only and should not be construed as professional or legal advice.
