Before approaching a mortgage lender, it’s essential for you to decide how much money you are willing to spend. And even more importantly, how much can you afford to spend. In fact most lenders won’t take you seriously if you go to them without a mortgage pre-approval.
So how to decide your spending level?
For deciding how much you can afford to pay in terms of monthly mortgage payments, almost all mortgage lenders have a set limit for DTI ratio or ‘Debt to Income ratio’, and your DTI ratio must fall under this set limit to qualify for the loan. In simple terms, DTI ratio is obtained by dividing all your monthly liabilities by your gross monthly income. So for you to decide your spending level, all you need to do is follow the same technique.
Calculate your liabilities and gross monthly income
Anything you have to pay on a monthly basis will be considered as a liability. Include all the installment payments for any education loans, car loans, mortgage, and the minimum payment you have to make for any credit cards. Also consider flexible expenses like gardening services, pool services etc. into this.
Now suppose your annual gross income is $120,000 and your monthly liabilities add up to $3,500. Your debt-to-income ratio will be 35% in this case. Also known as back-end DTI ratio, its maximum limit is generally 43%.
But this should not be your only consideration while determining your spending level. Although your loan will get approved as long as your DTI ratio is below the maximum limit, think about other expenses you might want to make in future. Monthly saving, retirement fund, vacations are some of the other things to keep in mind. It should not be your goal to take the maximum mortgage that you can qualify for. Rather you should take a mortgage you are comfortable with.