loan officer helping a client fill out paperwork for a house mortgage.

Determining How Much of a Mortgage You Can Afford

Published October 23, 2023

By Karla Kuhlman | Vice President/Manager Mortgage Lending | Creighton Branch

Buying a home is an exciting milestone in life, but it’s crucial to approach it with careful consideration and financial planning. One of the most critical aspects of purchasing a house is determining how much of a mortgage you can afford.

This decision sets the foundation for your financial stability and future. We will guide you through the process of evaluating your finances to determine an appropriate home loan amount that aligns with your budget and long-term goals. Once you’ve determined your budget for a mortgage, our lenders at Midwest Bank are here to help you through the process and get you into your new home.

Assess Your Current Financial Situation:

Begin by evaluating your current financial situation. Consider your income, monthly expenses, and any outstanding debts. Look at your budget to determine how much you can comfortably allocate toward housing costs each month. Understanding your financial health and obligations is crucial before diving into mortgage calculations.

Calculate Your Debt-to-Income Ratio (DTI):

The debt-to-income ratio is a vital metric that lenders use to assess your ability to handle a mortgage. It measures the percentage of your gross monthly income that goes toward paying debts. To calculate your DTI, add up all your monthly debt payments (credit cards, student loans, car loans, etc.) and divide the sum by your gross monthly income. Ideally, your DTI should be below 43%, but the lower, the better.

Consider Down Payment and Closing Costs:

The down payment is the upfront amount you pay toward the purchase price of the home. A larger down payment reduces your mortgage amount, monthly payments, and interest paid over time. Additionally, factor in closing costs, which include fees for loan processing, appraisal, title insurance, and more. Planning ahead and saving for these expenses will help you avoid financial strain.

Determine the Affordability Range:

Using your financial assessment and desired homeownership goals, you can now estimate a reasonable mortgage amount. Generally, your monthly mortgage payment, including principal, interest, taxes, and insurance (PITI), should not exceed 28% to 30% of your gross monthly income. This range provides a comfortable margin for other essential expenses and unexpected costs.

Buying a house is a big undertaking, but with careful consideration, research, and realistic assessments of your financial situation, you can make owning a home a reality. And we’re here to help if you need it.

Karla Kuhlman

Consider Other Housing-Related Expenses:

While the mortgage payment is a significant component, it’s essential to consider additional housing-related expenses. Property taxes, homeowner’s insurance, utilities, maintenance costs, and potential homeowner association fees should be factored into your budget. Understanding and accounting for these expenses will give you a more accurate picture of your overall affordability.

Explore Mortgage Options:

Research different mortgage options to find the best fit for your financial situation. Factors to consider include interest rates, loan terms, and the type of mortgage (fixed-rate, adjustable-rate, etc.). Consult with our lenders at Midwest Bank to prequalify for a loan, which will give you a clearer idea of the mortgage amount you can realistically obtain.

Allow Room for Future Financial Goals:

When determining your mortgage affordability, it’s crucial to consider your long-term financial goals. Will you need to save for retirement, education, or other major expenses? Allocating a portion of your income towards these goals is essential for financial security. Striking a balance between homeownership aspirations and other financial objectives is key.

Determining how much of a mortgage you can afford is a critical step in the home-buying process. By evaluating your financial situation, calculating your debt-to-income ratio, factoring in down payments and closing costs, and considering other housing-related expenses, you can arrive at an appropriate mortgage range. Remember, here at Midwest Bank, we’re here to help you explore mortgage options and help you reach your future financial goals. By approaching this decision thoughtfully, you can pave the way for a financially stable and comfortable homeownership journey.

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