Home Affordability

To find out how much of a mortgage you can afford, you need to calculate your expected monthly outgoings.

A lot of your monthly mortgage repayment will go toward interest and the loan provider, which is called P & I. But your monthly mortgage payment will also include amounts for taxes and home insurance. Your monthly mortgage payment is normally called a "P-I-T-I" which is short term for al the payments combined.

If you are unable to supply a deposit of over 20% of your home loan mortgage amount then you will also incur an additional payment for private mortgage insurance or PMI, Mortgage lenders ask for PMI to cover them for the higher risk of payment default.
When you have calculated your monthly mortgage payment, it would be wise to also calculate your mortgage and debt ratio. By doing this you will know the monthly amount that you will need to pay. These ratios also help lenders calculate how big a mortgage to approve for you.
A housing ratio is a calculation of your total monthly outgoing payments divided by your monthly gross, Most lenders try to obtain a 28% ratio which means if you earn €5000 a month then a €1.400 mortgage would be right for you.

A debt ratio is the monthly amount you pay out each month, this will include your mortgage,insurance, credit card etc divided by gross monthly earnings. Most mortgage lenders will hope to have your debt ratio no higher than 36% of you monthly gross income.

Most mortgage companies or lenders will use the 36% and 28% figures as a guideline. The % amount can and will change during economic cycles so if the economy is strong, the ratios would climb. If the economy is low they would drop, which in turn would make it harder to obtain a mortgage or home loan. Its only when the economy is high that its easier to get a loan of mortgage.

The amount of mortgage that you can afford also depends on the amount of deposit you have to put down. If you don't have one saved, consider these alternatives:
• Private mortgage insurance. Private mortgage insurance, allows you to make a down payment of as little as 5% of the home purchase amount.
• Borrow against the value of your investments. Some financial institutions offer mortgages that are backed by the value of your investments. With these programs, your investment portfolio serves as the collateral for your mortgage.
• Government housing programs. Most councils will have programs to help residents buy their first homes or obtain a mortgage.

In addition to a down payment, you will need to pay closing costs on your mortgage.
The amount you pay in closing costs will all depend on a points system, 1 point is equal to 1% of your mortgage amount but there are other costs that could be included which we list below.

• Fees to process your mortgage application, review your mortgage documents and fund the loan.
• Payments to fund an impound account. These funds are used to pay your homeowner's insurance and property tax. Generally, you replenish an impound account as you make your mortgage payments.
• Fees for legal and appraisal services, credit review, title search and mortgage insurance.
If you move to a new area or far away from your current home you will also need to pay moving costs to transport all your goods. You may also have higher living costs.

If you have moved to a new city for a job, your new company may help you with these expenses.

The above mortgage information is for educational purposes and is not financial advice. For advice that is specific to your circumstances, you should consult a mortgage plus or financial adviser.

Next, we'll look at obtaining a pre approval on a home mortgage loan.

Next Topic: Obtaining a pre-approval