Buying real estate with a mortgage is usually the most extensive personal investment most people make. To ensure that you can afford your dream home, it's important to understand how mortgage lenders calculate your income. In general terms, most prospective homeowners can finance a property whose mortgage is between two and two and a half times their annual gross income. The 28% rule is a popular way to determine how much you can pay for a mortgage.
To calculate this, multiply your monthly gross income by 28%. This ratio is the percentage of your annual gross income that can be spent on paying your mortgage each month. To determine your debt-to-income (DTI) ratio, your lender will total your monthly debts and divide that amount by the money you earn each month. Most mortgage programs require homeowners to have a DTI ratio of 40% or less, although you may be able to get a loan with up to 50% DTI under certain circumstances.
If you receive bonus income, your lender will look for a two-year history and average your annual bonus as a monthly figure to add to your mortgage application. Additionally, all mortgage applicants are eligible to use regular and ongoing disbursements to increase their mortgage income. To calculate the income of a self-employed borrower, mortgage lenders generally add up adjusted gross income as shown on federal tax returns for the past two years, and then add some claimed depreciation to that final figure. It's also important to consider how the mortgage insurance premiums required on all FHA loans will affect your payments.
That's why some financial experts find it more realistic to think in terms of your net income (also known as a net payment) and that you shouldn't use more than 25% of your net income toward your mortgage payment. In addition to your down payment, you'll have to pay a number of closing costs when you buy a home, including an appraisal, title insurance, a mortgage opening fee, real estate attorney's fees, and more. It means private mortgage insurance, which is a type of mortgage insurance that you might have to pay if you have a conventional loan. The best way to think about how much you can pay for a home is to consider what your maximum monthly mortgage may be. The housing affordability calculator will provide you with an appropriate price range based on your situation.
Many different factors influence the mortgage lender's decision on homebuyer affordability, but they come down to income, debt, assets, and liabilities.