3 calculations to see if you can afford a mortgage

One of the biggest challenges to buying a home is finding one you like and that you can afford. You can make this process easier by doing a bit of preliminary homework to determine a ballpark range for what you can reasonably afford in a new mortgage.
Here are 3 calculations to help you figure out your ideal mortgage.

1. Annual salary

A rule of thumb among mortgage professionals is that most borrowers can afford a home that runs about 2.5 times their annual salary. If your annual salary is $50,000, then you should be able to afford a home that’s $125,000.

2. Loan-to-value ratio

Calculate your loan-to-value ratio to see how much you can afford to borrow by dividing the loan amount by the property’s value. If your loan-to-value ratio is above 80%, your rates may increase significantly. Find a less expensive home or save up for a down payment to lower this percentage.

3. Debt-to-income ratio

Calculate your debt-to-income ratio by adding up your monthly debts and dividing by your monthly income. A debt-to-income ratio under 20–39% is usually considered good and will help mortgages professionals see you as financially stable.
Remember, don’t be afraid to start small. Just because you qualify for a large loan doesn’t mean that it’s a smart financial decision to buy as large a home as possible. Take a careful look at your family budget and your housing needs before you decide how much you can really afford.

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