Mortgage Rates are Rising: How Much Can I Afford?

Mortgage rates are ticking up right alongside inflation, and home prices continue to rise in many areas across the country. So if you’re looking to buy a home in 2022, it can be difficult to figure out how much you can afford.

One of the top questions we’re hearing from homebuyers across the US is, how much can I afford right now?

It makes sense. The minute you start shopping for a new home, you want to know how much you can afford and what your mortgage payment will be. With rates increasing it’s hard to plan ahead. After all, the last thing you want is to make an offer on your dream home only to watch your loan fall through.

One of the best moves you can make is to lock in your rate today by getting pre-approved, which we blogged about here.

5 SMART TIPS TO DECIDE HOW MUCH YOU CAN AFFORD

If you’re looking for a ballpark figure, be sure to check out this mortgage calculator. Just a reminder that daily mortgage rates can change and mortgage calculators only offer you a general idea of what you can afford.

The truth is, when you apply for a mortgage, your borrower profile determines your mortgage rate: income, employment, credit history, assets, and debt-to-income ratio. For this reason, mortgage calculators are useful, but they are only a starting point.

The best action you can take is to connect with a local mortgage advisor. Start here to find an experienced advisor in your neighborhood.

Tip #1 – Evaluate your spending habits.

When you start shopping for a new home, look at your current spending patterns. This might seem like a simple approach, but it’s common for some borrowers to qualify for a mortgage they can’t really afford.

This is because home loans are largely based on algorithms defined by mortgage lenders to calculate risk. If your spending habits aren’t in line with your new mortgage payment, it’s better to know your limits before you apply.

Also, think about creating a new budget based on being a homeowner. For example, do you plan on hosting backyard BBQs, putting in new landscaping, or maintaining a pool? Remember, you’ll have new monthly costs such as homeowner’s insurance, property taxes, home maintenance, and unexpected repairs.

Related: How to FAST TRACK your mortgage pre-approval

Tip #2 – Follow the standard 28/36% rule.

Most financial advisors recommend putting 28% or less in monthly income toward housing. As a homeowner, this amount (before income taxes) should be able to cover all housing costs, including your mortgage payment, utilities, property taxes, and homeowner’s insurance. 

The 36% rule extends the recommended monthly allotment to include debt repayments. For this model, all housing costs plus all debt repayments (such as credit cards, auto loans, student loans) should fall at or below 36% or your monthly gross income.

Some borrowers decide to set up a mortgage escrow account, which can help create a monthly budget. With an escrow account, your mortgage payment will include your property taxes and homeowner’s insurance. For homeowners, this is a convenient option that can help to establish financial stability.

Related: Does every mortgage need an escrow account?

Tip #3 – Evaluate your debt-to-income ratio (DTI).

Your debt-to-income ratio is one of the main factors mortgage lenders use to determine risk. To determine your debt-to-income (DTI) ratio, simply measure your gross monthly income against your monthly debt obligations.

Monthly expenses such as groceries or utilities are not taken into account here. Instead, only debt obligations count toward your DTI. For example–car payments, student loans, and credit cards would be included to determine your DTI when you apply for a home loan.

If you have a debt-to-income ratio above 43%, it will be more difficult to qualify for a mortgage at a low rate. Ideally, the lower your DTI, the better home loan you’ll secure.

That said, there are a number of custom loan programs to help homebuyers qualify even with a high DTI. So talk to your mortgage advisor and start your application to lock your rate and get pre-approved for your best home loan.

Mortgage rates rising, but this doesn’t mean you have to max out on your mortgage. It’s wise to keep a buffer in your finances when it comes to how much house you can afford. An affordable mortgage payment can help you breathe easier. Connect with a local mortgage advisor to get started.

Tip #4 – Boost your credit score.

It’s always a good idea to download a free copy of your credit report. This will give you a chance to fix any errors, dispute incorrect information, and know your credit score.

One of the best ways to boost your credit score fast is to pay down credit cards (start with the highest balances), keep your credit accounts open, and don’t apply for any new credit. Be prepared to offer an explanation for anything on your credit report that is out of the ordinary. This can help you get a better mortgage.

Related: Boost your credit score in less than 60 days

Tip #5 – Plan your down payment.

If you’re able to put down at least 20% toward your new home, you’ll have more loan options at the best rate. Staying below 80% LTV (loan-to-value) typically means the mortgage lender won’t require PMI (private mortgage insurance). As a result, you’ll secure a lower mortgage payment and a better mortgage rate.

That said, there are several loan options and custom mortgages available. Many home loans for first-time homebuyers offer home loans with 0-5% down. FHA loans only require a 3.5% down payment. Conventional 97 requires only a 3% down payment.

Take the best next step and connect with a mortgage advisor to lock your rate and get pre-approved. An advisor can look at the big picture, offer the best loan options, and help you decide which home loan is best based on your homeownership goals.

Taking Action

Get pre-approved and lock in your mortgage rate now. Deciding how much you can afford can help you fast-track your mortgage pre-approval, especially in today’s housing market. When you’re ready, an experienced mortgage advisor can help you get approved, lock in the lowest mortgage rate, and secure the right home loan. Connect with a local mortgage advisor to discuss your options and save money on your mortgage. We’d love to help.