While mortgage calculators and rules of thumb such as
buying a home no more than 2.5 times your salary can give
you a broad sense of how much you can afford to spend on
a home, a more accurate estimate of your housing budget is
essential before you make an offer on a home.
Determining your maximum purchase
price for a home depends on how
much you have in cash or gift funds
or homebuyer assistance programs
for a down payment and how much
you can borrow. A lender can pre-
qualify you for a loan based on an
estimate of your income and credit
prole, but before you seriously begin
house hunting, you should get a full
preapproval for a mortgage based on
verication of your income and assets,
your credit score and your debt.
Decide your own comfort level for your housing payment
A mortgage lender will follow a specic formula – usually with an
automated system – to determine the maximum amount you can borrow.
But even before you meet with a lender, you should review your personal
nancial picture and decide for yourself how much you would be com-
fortable paying for a home. There are a couple of ways you can do this.
Learn more on topics important to property owners: www.RealPropertyAlliance.org
www.IllinoisRealtors.org
Homeownership:
HOW MUCH MORTGAGE
CAN I AFFORD?
Mortgage Options
Your mortgage payment will
depend on your loan term
and interest rate. In general, a
longer loan term will have lower
payments, but will usually have
a higher interest rate, and you’ll
pay more in interest over time
because of the term. If you can
afford the higher payments, a
loan term of 15 or 20 years can
be a smart move to build your
home equity more quickly.
Mortgage insurance
If you make a down payment of
less than 20 percent on a con-
ventional loan, you’ll pay private
mortgage insurance until your
loan-to-value reaches 80 percent.
If you choose an FHA-insur
ed
loan, you will only need to make
a down payment of 3.5 per-
cent, but you will pay mortgage
insurance for the life of the loan.
Those mortgage insurance pay-
ments could add $100 or more to
your monthly housing payment.
VA and USDA loans don’t require
mortgage insurance.
A good lender can work
with you to compare various
loan terms and make
recommendations on the
best choice for you, and
steps you can take to
position yourself for a solid
nancial future.
1. Look at your current rent payment (or mortgage if you are a repeat
buyer) and think about whether you can handle paying more if you buy
a home. Keep in mind that your housing payment includes principal and
interest on the mortgage, property taxes and homeowners insurance. If
your down payment is less than 20 percent, you’ll need to pay mortgage
insurance.
You may need to pay homeowner association or condominium associ-
ation dues. You should budget at least one percent of the home price
for maintenance and repairs. However, if you go from renting to buying,
you will be able to deduct your interest payments and property taxes on
your income taxes.
2. One way to evaluate your comfort level is to write down a budget that
includes all of your monthly obligations as well as discretionary spend-
ing. A lender won’t include extra savings for future college expenses
or retirement in your loan calculation and won’t even think about your
expenditures for vacations or golf or your intention for one spouse to re-
duce work hours to take care of your family. Consider important nancial
and life goals in your personal housing budget.
Mortgage loan qualications
Shop around for a mortgage with several different recommended lenders
because they have different guidelines and different loan programs.
Lenders base their decision on your credit score, cash reserves, job history
and debt-to-income ratio. If you are weak
in one area but stronger in another, you
may still be able qualify for a mortgage.
Most programs allow a maximum debt-to-
income ratio of 41 percent to 43 percent.
To calculate your ratio, compare your
gross monthly income — including all
income that can be documented — with
your monthly debt payments includ-
ing your new housing payment and the
minimum monthly payment on all your
outstanding debt, such as a credit card, a
student loan, a car loan, alimony, child support or a personal loan. Don’t
forget that the housing payment includes principal, interest, taxes, insurance
and possibly mortgage insurance and/or a homeowner association fee.
In order to qualify you for a loan and determine your interest rate, a lender
will look at a variety of factors, including your income, assets, down pay-
ment, credit score, debts and job history. The higher your credit score, the
lower your interest rate will be for conventional loans, which in turn means
your payment will be lower. Federal insured mortgage loan programs such
as FHA (Federal Housing Administration), VA (Veterans Affairs) and USDA
(U.S. Department of Agriculture Rural Housing Development) loans typically
have the same interest rate regardless of your credit score.
What Can I Really
Afford?
Lenders base their decision
on these four factors:
• your credit score
• cash reserves
• job history
• debt-to-income ratio
If you are weak in one area
but stronger in another,
you may still be able
qualify for a mortgage.
Learn more on topics important to property owners: www.RealPropertyAlliance.org
www.IllinoisRealtors.org
Use this guide as a
starting point for your
home purchase, and
consult your REALTOR
®
for further guidance.
