Morty the Mortgage Guy - Pay Scale
Many people will tell you that the rule of thumb is you can afford a mortgage that is two to two-and-a-half times your gross (a.k.a. before taxes) annual salary. And some say even higher. There are a ton of variables, and these are just loose guidelines. That said, if you make $200,000 a year, it means you can likely afford a home between $400,000 and $500,000.
Oh, perfect. That was easy. Off to go take out a mortgage now! Bye!
Woah, slow down! We’re just getting started here. Remember? There are two questions that you need to consider when figuring out the answer to how much mortgage you can afford.
1) How much debt you are willing to take on?
2) How much debt is a lender willing to extend to you?
The former is definitely important (and we’ll get to that later) but the latter is what we’re going to discuss here.
So, we are trying to determine how much your lender thinks you can afford. After all, they’re the one taking the risk by loaning you the money. They’re going to be very concerned about your job, how much money you make in a year, how much money you can put down up front, your credit score and more.
Your lender is going to take all your information and come up with two figures to guide them: your back-end ratio and your front-end ratio
OK, so they’ve got my information and have done some math. Now what?
From there, the lender will determine what length of loan and interest rate they feel comfortable giving you. To figure this out, they’ll take a look at your credit score, which ranges from 300 (poor) to 850 (excellent). As you’d expect, the higher your credit score, the lower the interest rate you’ll generally get, though the amount of your down payment also gets factored in.
It’s difficult to say what constitutes an ideal credit score for taking out a mortgage (850 wouldn’t hurt), but a number between 700 and 740 seems to be a good range. In general, 620 is considered the lowest acceptable score that will get you the green light.
You also have to consider how you’re going to decorate the house:
Can you afford to furnish every room?
And what do you expect your utility bills to be?
What if the stove breaks in six months? Will you have the savings to get it repaired quickly?
And speaking of savings, how’s that situation going, or going to change in the months and years ahead?
Are you currently trying to stow away lots of money for the future? If so, that’s another issue you need to consider.