The double whammy of higher home prices and rising mortgage rates have a lot of Americans reevaluating the mortgage they can afford and how much a mortgage lender will lend them.  What do these higher rates mean for you?

Calculating Mortgage Affordability

There are several ways individuals can calculate the monthly mortgage amount affordable for them.

• The 28% Rule—This rule says that an individual should spend no more than 28% of his or her gross monthly income on a mortgage payment; this is to include principal, interest, taxes and insurance.
• The 35%/45% Framework—This approach suggests that an individual’s total monthly debt (e.g., credit card, auto, mortgage, etc.) should not be greater than 35% of pre-tax income or 45% of after-tax income.

These, of course, of rough guidelines, but the amount any borrower can afford will depend upon an individual’s personal circumstances, such as atypically high medical expenses or private school tuition costs.

Ultimately, the amount an individual is permitted to borrow will be based upon a lender’s standards. Among the data that most mortgage companies review are:

• Gross income
• Debt-to-income ratio—The higher the debt is to income earned, the lower the mortgage for which an individual is likely to qualify. This debt-to-income ratio may be viewed on a pre- or post-tax basis.
• Credit score—Most lenders have a minimum credit score requirement. A good credit score is especially useful for individuals with a high debt-to-income ratio since it shows they can handle high debt responsibly.
• Down payment—A sizable down payment (e.g., 20%) may increase how much a lender is willing to lend since it shows that a borrower will have meaningful “skin in the game.”
• Work history—Steady, continuous employment is important. Lenders typically look for at least two years and steady income with the individual’s current employer.
• Appraised home value—A home appraisal and home inspection assures the lender that the home being purchased is in good condition and being bought at a fair market price.

There are a number of things prospective homeowners can do to lower their monthly mortgage payments, including electing a longer mortgage term, improving their credit score (better credit sources may mean lower interest rates), making a larger down payment and eliminating the cost of private mortgage insurance by putting down at least 20% of the purchase price. The final option, of course, is to buy a less expensive home.

If looking to make such a significant purchase, speaking with a financial professional can help in planning and making decisions.

Please reference disclosures: https://blog.americanportfolios.com/disclosures/