Are you concerned with how a mortgage payment will affect your monthly budget? Fortunately, mortgage professionals will tell you what you can afford based on your current income so you don’t waste your time looking at houses out of your price range. They won’t let you get over your head with an unaffordable payment. Mortgage programs today all enforce maximum debt-to-income restrictions that prevent buyers from acquiring mortgages they can’t realistically repay. Debt-to-income ratios are calculated by taking your monthly financial obligations plus the proposed mortgage payment and dividing it by your monthly income. The resulting figure represents the amount of your income that is automatically allocated to paying financial obligations. Each mortgage program sets their own guidelines, but generally a buyer’s debt-to-income ratio must not exceed 50%. This helps ensure that you have enough money remaining each month to build a savings or cover other undocumented or unexpected expenses. There may be some exceptions, however; especially if you have substantial assets or a large down payment.
If you really want a house that is outside of your budget, there are still ways to buy it. If you have a large down payment, you can pay down the purchase price to an amount that you can afford to finance. This will give you low monthly mortgage payments. Many buyers don’t have the time or ability to save up enough for a large down payment, though. If this is the case, you can ask a trusted family member or friend to cosign on the mortgage. Their added income may be enough for you to afford your dream house. Some programs like the 3.5% down FHA mortgage will even allow gift funds in lieu of a traditional down payment if you can request it from family, friends, employers, or other organizations.
Mortgage payments are made up of several factors including the PITI (principal, interest, taxes, insurance). Additional costs such as HOA fees may also contribute to your monthly payment, depending on your neighborhood and/or city’s requirements. Your house may also require other fees such as flood insurance if it’s in a flood zone. You can’t negotiate taxes and interest rate, but you can negotiate the home’s purchase price and shop around for the best homeowner’s insurance rate. The lower the purchase price is on your home, the lower your mortgage payment will be. You can work with the seller to settle on a purchase price that meets both your needs.
Mortgage lenders allow you to choose your homeowners insurance provider. This way, you can pick a company you are comfortable with and an agreeable rate. Insurance providers are a lot like mortgage lenders in that they abide by their own respective guidelines when setting approval standards and approving applicants. It’s unlikely that two insurance providers will offer the exact same rates and terms. Factors such as credit history, past insurance claims, and even whether or not you’re an existing client of that insurance company will determine your rate. It’s recommended that you shop around to get the best rate. Many buyers even find that an insurance company will offer an affordable bundle deal for their homeowners and auto insurance.
You don’t have to make a large down payment to get an affordable mortgage. Many low-cost and no down payment mortgage programs offer great, competitive mortgage rates that help keep payments low. The FHA loan only requires 3.5% down and, as previously mentioned, that down payment can be gifted by approved sources. The funds can even come from multiple donors. Since this loan is insured by the Federal Housing Administration, lenders can give low rates to eligible applicants. The USDA and VA loans are zero-down mortgages that, even despite requiring no down payment, offer below-market rates. The USDA loan is guaranteed by the United States Department of Agriculture. Eligible buyers in approved rural areas can take advantage of a zero-down, low-rate mortgage with great monthly payments. The VA loan is also a zero-down mortgage, but it is only available to eligible service members of the United States armed forces. Since these two loans are also government-backed programs, their mortgage rates are guaranteed to be competitively priced.
Payment-conscious buyers shouldn’t feel worried about being unable to afford their dream home. Mortgage rates have consistently been at historical lows for over a year with little change anticipated. Low rates as well as mortgage programs with great terms results in affordable mortgage payments. You can take control of your payment, too, by negotiating a lower purchase price, shopping for a great insurance rate, and coming up with a down payment to buy down the principal payment.