Home Loan 101: How Much Can You Afford?
Neglecting to check into that aspect can undoubtedly cost you a lot in terms of eligibility, because lenders will always examine our credit report thoroughly, generally not missing a thing, which from start should encourage the would-be borrower to do the same.
The more creditworthy you are, the better eligibility you have.
Then there comes the question: How much can I afford? This is an essential question that all home buyers should ask, because while many people take the largest loan the lender will offer, it may not always be the best option.
Typically, most would-be home buyers can afford to get a loan for a house that costs between 2 and 3 times their gross income.
If your credit history is good and acceptable, then the lender may allow you to take out a mortgage with a monthly payment equivalent to 40% of your gross monthly income, although this aspect needs great attention, because although eligibility is indeed based on gross income, monthly payments are made with the net income.
It's important to know what your lender estimates you can afford before making a decision, as lenders use complex and specific formulas to determine whether one particular mortgage can be handled by an individual, and may shed further light on the subject of how much you can really afford with a mortgage.
What happens when you embark on a journey with a large loan? The term of the ensuing situation is "house poor.
" This term defines cases in which a person spends a large proportion of their income on house ownership, remaining short of cash for other items and commonly having trouble with paying off their other financial obligations.
While not all "house poor" individuals are unable to pay their bills after somehow managing their mortgages, they are most often in financial chaos, which puts the perspective of unexpected, additional costs of living in a very grim light.
The very best advice when deciding on a home loan and whether you can afford it or not is to take as little risks as possible.
Even if there are higher loans that a lender can approve for you, you will have to take into consideration that the period of time in which you are making yourself responsible for these payments is a very large one, and precautions are best taken before potentially deciding on a more expensive house.