When you borrow money for a home, that payment must include the principal, interest, taxes, insurance, and any homeowners association fees. While there are several methods that you can use in order to calculate your affordability, one of the easiest to calculate is the 28% rule. The 28% rule says that you should spend 28% or less of your gross monthly income on your mortgage payment. Many lenders have calculators that you can use for this. For example, if your gross monthly income is $10,000, then your payment should not be greater than $2,800.

While every lender has different standards by which they determine a buyer’s qualification for a mortgage, there are three main points that stand out; gross income, debt-to-income ratio, and credit score. 

Gross Income

Your gross income is the sum of your wages, salaries, interest payments, and other earnings before deductions.

Debt-to-income Ratio

Your debt-to-income ratio is how much you make versus how much debt you have. In order to calculate your DTI, add up all of your monthly debts and divide that by your monthly gross income and multiply by 100. 

Your score:

35% or less = you are in great shape

36-49% = opportunity for improvement, lender may ask for additional eligibility criteria

50% or more = your funds are limited and you will need to pay some of that debt to qualify

Credit Score

Your credit score demonstrates your ability to handle the debt that you have. Mortgage lenders use FICO scores obtained from the three prime credit bureaus, Experian, Equifax, and Transunion. Your credit score not only determines your ability to obtain credit but it also is a determining factor in your interest rate. Check your credit report annually and make sure to fix any errors before applying for a loan as this can adversely affect your rate.

Things that you can do to lower your monthly mortgage payment

If you qualify but desire a lower monthly payment there are things that you can do to lessen that amount.

1. Lengthen your loan term - the longer that you borrow the money for, the lower each monthly payment will be

2. Make a larger down payment - while 20% is considered the standard, you are not obligated to stay with that percentage. If you are comfortable putting down more money, this will lower your principal and thus your monthly payment.

3. If you purchase a loan product, for example an FHA loan, that requires less than 20% down, you will be paying private mortgage insurance or PMI as an add-on to your payment. If you can, try to put down 20% to avoid this unnecessary extra charge.

4. If today’s interest rates are maxing out your budget but you need to buy a home, know that interest rates fluctuate with the stock market. Next time the interest rate falls, refinance. That will lower your monthly payment, usually significantly.

Use a local mortgage broker

From a financial standpoint, this is the most important information that I can give you! Did you know that mortgage rates vary from state to state? Mortgage lending is a business and is subject to regional laws and rules of supply and demand that are passed on to the consumer. While rates are dependent on a national level by the current price of mortgage backed securities, a financial instrument sold openly on the stock market, they are also affected by local laws and business competition that will affect the final rate sold to the consumer.

Key factors that play a local role in your mortgage rate:

1. Foreclosure laws - when a home is foreclosed upon the lender takes possession of the deed and the right to sell from the homeowner in order to obtain the money that they loaned back. Some states require what’s called a judicial foreclosure. This means that the mortgage company has to go through the court system in order to foreclose and gain the right to sell. This takes an extended period of time costing the lender money. That cost is passed to the consumer in states with a higher foreclosure rate. Out of all 50 states, North Carolina ranks #10 in foreclosures with the most foreclosed properties located in Jones, Lee, Craven, Camden, and Pasquotank counties; all located in the eastern half of the state, far away from the Blue Ridge.

2. Cost of doing business - some states require lenders to perform certain business practices in order to sell mortgages to consumers. Again, that cost is passed on to the borrower. Such practices would be requiring business to be conducted in a brick-and-mortar establishment.

3. Competition - when there are many lenders serving a smaller area that creates a competitive business situation requiring lenders to lower their rates in order to sell more loans. This benefits you, the buyer! Simple supply and demand.

As much as we would like to hope that this would make a significant difference in our payment, the realistic fluctuation is only about .3%. But what you can benefit from by using a local mortgage broker is their knowledge of the area, understanding of the different nuances that occur in property conditions that can affect loan qualification, and their relationships with local vendors to save you money on costs such as appraisals.  

Also, remember that a mortgage interest rate is a commodity and you should shop for it with the same diligence as you would shop for your home. Don’t assume that your bank is going to have the best rate. Banks usually have one rate that they sell approved by their business with very few product variations. A mortgage broker will shop your rate to ensure that you get the lowest priced mortgage product available.