Like most people, your home will be one of the largest purchases of your lifetime. But many people are unaware of how much home they can afford until they begin to try to qualify for a mortgage. It’s always best to go into these types of financial decisions with eyes wide open so here are some ways to make sure you aren’t overextending yourself.
Developing a Housing Budget
Buying a new home can be an exciting time but you don’t want to box yourself in financially. Buying a home you can’t afford means that you will feel stretched and may struggle to meet your obligations. To avoid this, it’s good to have a housing budget that makes sense.
Budgeting for a home is important before you begin to shop. You will want to understand what your income is and how much money you have to offer for a downpayment. Add up your household expenses and any other financial obligations you have each month. Next, weigh your income against your monthly expenses and you will get a good idea of where you are now.
The 28/36 Rule
When trying to determine how much home you can afford, most financial advisors suggest the 28/36 rule. This means that no more than 28 percent of your gross income should go toward home expenses and no more than 36 percent should go toward all monthly debt combined. If you find that you’re spending more than 40 percent of your gross income on monthly expenses, all it takes is one emergency to possibly set your financial picture on a downward spiral.
Consider Your Own Comfort Level
Mortgage lenders typically don’t like to lend to borrowers who they may perceive as a potential risk for default. Many mortgage lenders will consider a larger debt load than the 28/36 rule when considering a borrower for a mortgage. It’s up to the home buyer to decide how much monthly debt is within their comfort zone and to buy a home accordingly.
Having Cash on Hand
Mortgage lenders want to see that there is remaining cash in the bank after the purchase and closing of a home. It’s important to have cash reserves available in case of emergencies. A lender wants to see that you have cash in the bank to cover any housing costs temporarily if your financial situation changes. Three to six months of housing payments set aside in your savings are optimal, but many people find that difficult to do, particularly new home buyers.
Before home buying, you should get a written prequalification from a licensed mortgage professional to understand what you can afford to buy and how much mortgage you can qualify for. At First Savings Bank of Louisville, we offer no-obligation prequalification’s so you can understand where you stand financially before you go shopping. Whether you are looking for a mortgage in Louisville or anywhere in Kentucky, we can help you make sense of home buying and mortgage qualification by considering
- Your monthly gross income
- Your existing debt
- Your credit score
- What you will need for a down payment and cash reserves
- The current real estate market
- Current mortgage rates
- Mortgage types that may fit your needs
Call us today at (502) 238-9655 to speak with one of our licensed Louisville mortgage brokers.