How Much Mortgage Is Right For You?

So, you found your dream home, or you’re ready to make some of those nifty home improvements, or you are one of the few people that have not recently refinanced your home, and you are ready to look for a new mortgage loan.

When you visit your mortgage banker, you will fill out an application, which includes, among other things, your gross monthly income (before taxes) and all your monthly payment obligations – vehicle loans, credit cards, other consumer debt, child support or alimony.

In order to qualify for the lowest range of interest rates:

(a) your monthly house payment (principal, interest, taxes and insurance) must not exceed 28% of your monthly gross income.

(b) the total payments on all your debt obligations must not exceed 36% of your gross income. The loan officer will calculate your ratios and tell you the maximum loan amount for which you are qualified.

Great. That number becomes the loan amount with which you should feel comfortable, right? No, not so fast. That number is the maximum amount the lender will loan you. This number should come in a lovely presentation case accompanied by flashing red lights and alarms going off.

Think about this for a minute. The people in the business of lending money are unwilling to lend you more than this magic number. That means this maximum loan amount puts you right on the edge of having borrowed too much money.

These loan amounts are calculated based on predictive models of what the average consumer with a given income can afford to pay for housing. The problem is you are not the average consumer. You’re different. We all are.

For example, the average American gives about 1.7% of annual gross income to religious and charitable causes. How much do you give? Let’s say you are supporting your church with a tithe (10%) and give an additional 1.7% of your income to all other charitable causes, for a total of 11.7%. You are spending 10% more of your income for religious and charitable causes than the average American. If you have monthly household income of $4,000, then you will come up short $400 per month, if the rest of your spending habits fit the norm. How do you make up that difference?

So, what amount is right? The number is different for everyone, but a conservative rule of thumb is that the mortgage loan amount should not exceed two times your annual gross income. Before you get all the mortgage that is offered, take some time to work that payment amount through your monthly budget. Are you left with a reasonable cushion? The answer may surprise you.

Dee Sokolosky

President of First Bank of Owasso