In order to find out if you can yourself a homeowner, you need to figure out how much mortgage you can afford. When you become a homeowner, you feel secure and safe in your home. However, those two things will not pertain to you if you do not feel financially secure in your home.
You have to calculate how much mortgage you can afford by factoring in your present and future goals. When lenders present you the mortgage amount, they leave those to factors out of the equation. Therefore, it is up to you to think about your future and all the major life changes and events that may follow.
For instance, do you plan to grow your family? Do you plan to pursue an advanced degree? Do you plan to have your parents move in with you? Consider everything you think may increase your financial burden in the future to estimate the mortgage amount you can afford.
Establish Your Budget
First, you need multiply the price of a prospective home two times by your gross salary. If your gross salary amounts to £200,000, you can afford a home priced between £300,000 and £400,000. The only downside to using this method to calculate mortgage affordability is that it does not consider your existing debts and monthly expenses.
For instance, you earn £200,000 each year, but have to put £2,000 towards monthly payments, involving car loans, student loans, and credit card payments. In short, you cannot afford a home mortgage as a person earning the same as you, but with no debts.
Prepare a budget, consisting of credit cards, due loans, monthly bulls, lunch, day care, savings, date night, and vacations. The amount left is the amount you can use towards mortgage, insurance, utilities, and property taxes.
Consider Your Down Payment
People who can afford to put down a large down payment will decrease their monthly payments. If you give a 20 percent down payment on the house, you may not obtain a mortgage or may have to sign up for some plan that protects the lender in the event you default on your loan payments. If you cannot afford a large down payment, save up money, until you can.
Consider Your Outstanding Debt
The lender will not approve your application for a loan if your monthly bills (car loans, credit cards, and utilities) exceed 43 percent of your gross yearly salary. Here is how you can figure out if you meet the lender’s fewer than 43 percent criteria:
- Your gross yearly salary is £200,000
- Multiply £200,000 by 43 percent to receive £86,000 in yearly salary
- Divide £86,000 by 12 months to change the yearly 43 percent limit into a upper limit of £7,166 per month
- Your monthly bills and your possible mortgage amount when added together should not be over £7,166 per month
Do not apply for mortgage if you know you will not be able to afford the monthly payments. Instead, save up money to put down a down payment.