How to Budget for Purchasing Your New Home
Part of shopping for a new home means defining your budgeting parameters. That’s why it’s crucial to be aware of the maximum limit you can take out for your loan. To calculate your maximum limit, a maximum mortgage calculator can be used to assess your gross pre-tax income in relation to your recurring monthly debt payments.
The Home Loan Expert is here to guide you through determining the maximum loan amount that you can receive.
How Does Your Debt-to-Income Ratio Affect Your Mortgage Loan Limit?
How much you can borrow with your loan is largely determined by your debt-to-income (DTI) ratio. This measure compares your steady income to what you are obligated to pay monthly towards your indebtedness. It is calculated by dividing your monthly expenses by your pre-tax, gross monthly income. You can then multiply that figure by 100 to see your DTI ratio expressed as a percentage.
Let’s say your income is $6,000 and the debts you pay monthly are $1,500.
$1,500/$6,000 = 0.25
Now let’s express this as a percentage: .25 x 100 = 25%
Now let’s see what it looks like with a monthly mortgage payment of $2,500.
($1,500 + $2,500) / $6,000 = 0.5
That figure expressed as a percentage looks like: 0.5 x 100 = 50%
Acceptable DTI ratios vary from lender to lender, with a DTI of 43% as the lower limit and a DTI of 50% as the upper limit. This means that your monthly mortgage payment and recurring monthly debts cannot exceed this amount.
In the above example, the borrower would want to work on lowering their monthly debts, increasing their income (or both), or choosing a house with a lower monthly payment when budgeting for the maximum loan amount they can take out.
Keep in mind that you are under no obligation to take out the maximum loan amount you might qualify for. It is still recommended not to bite off more than you can chew when it comes to monthly payments and create a financial plan of action that falls within your budget.
How Do You Use a Mortgage Capacity Calculator?
Complete the entry fields below to calculate your maximum mortgage limit. For a better estimate, be sure to provide the most accurate financial information for each input. This will help give you a more realistic figure of what to expect when shopping for a house. If you are signing a loan with a co-borrower, be sure to input their financial information into the correct fields.
- Pre-tax Gross Monthly Income. Your monthly salary, side hustle, rent received, bonuses, dividends from investments, alimony or child support, and benefits received from entitlement programs all count towards your income. Enter any steady source of income each month as it appears before taxes.
- Monthly Liabilities. Any debts you pay monthly on a recurring basis fall under this category. It can include anything from auto loans to student loans to credit card payments to paying alimony and child support or other types of installment and consumer debts. You do not need to include monthly bills such as utility bills, cell phone bills, food, and entertainment.
- Monthly Housing Payment. The principal, interest, property taxes, and insurance (PITI) are included in your monthly housing payment. Aim for your PITI should only consume around 28% of that amount to leave room to pay off your monthly liabilities.
- Maximum Principal and Interest (PI). Your maximum monthly principal and interest payment is calculated by subtracting your monthly taxes and insurance from your monthly PITI payment. It is used to determine the mortgage amount that you could qualify for.
- Starting Interest Rate. This is the interest rate you believe you will receive on your mortgage. Depending on your loan type, you can choose a fixed-rate loan or an adjustable-rate mortgage (ARM). Your annual interest rate will remain unchanged over the life of your fixed-rate loan. The interest rate on an ARM comes with a fixed initial interest period and then switches to a variable interest rate once the initial period concludes. Borrowers in a better financial standing qualify for better rates and terms on a loan as they pose less risk to their lender.
- Loan Term. You’ll need to decide if you want a longer loan term with more affordable monthly payments to increase your purchasing power, or a shorter loan term with more aggressive payments to save thousands otherwise spent in interest over the life of your loan. Typically, loan terms are issued at intervals of 15 or 30 years; however, 10 year and 20-year loan terms are also possible.
How Can The Home Loan Expert Help?
The Home Loan Expert is committed to getting you the best deal possible on a loan that can be used to get you into your dream home. What started as a small one-man, door-to-door operation has now expanded nationwide, providing home buyers of all kinds of financial bandwidths with the tools and expertise needed to get approved on a loan that fits within their budget.
You’ll likely have some questions about your maximum mortgage limit that a loan limit calculator cannot answer, and that’s why we’re here! Our friendly lending Experts come from the same communities we serve and offer a personalized, relatable customer service experience. Plus, our in-house underwriting process allows us to streamline your loan approval quickly and painlessly — with closing times in as little as two weeks.
So give us a call today at 800-991-6494 to speak with a representative who can help you determine your maximum mortgage amount.
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