Mortgage Qualification Amount vs. Monthly Payment: What’s the Difference?
March 9, 2021
When you find out the amount of your mortgage qualification, you may be tempted to immediately call your real estate agent to get straight to shopping for a home that fits that number. But, wait. There is a difference between what you may be approved for and what you will be able to pay, and understanding these distinctions makes a significant impact on your future financial health.
A mortgage qualification is an estimate of what you may be able to borrow based on a preliminary credit check and information you provide your lender. As a potential homebuyer, this number allows you to look for homes in your projected price range and avoid the unnecessary disappointment associated with bidding on homes that cost beyond what your lender will front you. You and your realtor can more knowledgeably house shop and submit home purchase offers that have better chances of being accepted.
When estimating your qualification amount, lenders will typically look at your:
- Gross income
- Mortgage-to-income ratio (front-end ratio)
- Debt-to-income ratio (back-end ratio)
It is important to note that your mortgage qualification should be used as a tool rather than the sole criteria on which you place your home purchasing decision.
More important than knowing your qualification rate is being confident that you can actually pay your mortgage each month for the next 15 or 30 years. This is particularly true because your qualification number does not consider any financial goals you have for your family, such as having a baby or other life-changing circumstances. Several factors affect your monthly payment.
When considering how much home you can comfortably afford, there is a general rule of thumb. It states that no more than 28% of your gross monthly income – before taxes are taken out – should be spent on your mortgage, and no more than 32% of your back-end ratio – or annual gross income that goes toward debt – should be spent on your total housing payment, including any taxes, insurance, and mortgage. Another stipulation states that your total debt payments each month should not exceed 40% of your gross monthly income. This means that if you have hefty auto loan payments or credit card debts, to name a few, you will not afford as large a house payment as you may have hoped.
It used to be standard that lenders would expect you to put down at least 20% of your home’s price upfront, which would incrementally decrease the monthly payment amount. Down payments can now be as small as 0% in some instances or 3-5% on most loans. The more you can pay for your home at closing, the more you will avoid tacking on associated interest costs, and the less you will have to pay over the life of the loan. If you cannot pay the ideal 20% down payment, your lender will likely require you to obtain private mortgage insurance (PMI), which protects them should you become unable to pay your mortgage. However, you can avoid the PMI if you pay a one-time payment at closing to lower the monthly payment.
Loan Interest Rate and Term
Your mortgage loan’s interest rate is one component to determining your monthly payment and whether you can afford it. Higher interest rates equal higher monthly payments, while the reverse is also true.
Your loan’s term also plays a part in determining your monthly payment amount. Shower loans have lower interest rates and therefore cost less month-by-month, while loans with higher durations will accrue more interest and therefore cost you more each month.
Insurance and Property Taxes
Insurance and property taxes for your home also affect your monthly payment, which is comprised of 4 parts referred to as PITI (principal, interest, taxes, and insurance). Your property’s taxes and insurance are generally held in escrow to ensure payment is fulfilled, while you are responsible for 1/12 of the total amount in your monthly payment. Property taxes fluctuate based on the economy and your home’s perceived value, while your homeowner’s insurance can go up if you add coverage. You will then notice increases or decreases in your payment based on these factors.
Homeowners who reside in their residences on a permanent basis are eligible for what is known as the homestead exemption. This tax deduction can reduce taxable property value by up to $50,000. Lower taxes on your home translates into lower monthly mortgage payments.
Other Homeowner Costs
Finally, your monthly mortgage is likely not the only payment you will need to make for your house each month. It is wise also to be aware of ongoing maintenance needs, utility costs, and any homeowner association or community fees for your neighborhood when projecting what you will have to pay out of pocket for your home.
The Mortgage Firm North Central Florida Is Your Guide
Unless you are in the mortgage industry or have a thorough understanding of it, you may feel overwhelmed trying to learn all the different mortgage terms, loan types, and other financial considerations. Your team at The Mortgage Firm North Central Florida is knowledgeable and ready to help you throughout the entire process, from qualification to putting your key in the door at your new home. Contact us today to learn how we make it easier for you to buy the home of your dreams without getting in over your head with the monthly payment.