Start With Your Monthly Mortgage Payment, And Work Backwards
One crucial step in getting started with Guild Mortgage on a Michigan mortgage is to determine how much of a mortgage payment you can comfortably afford, given your other financial commitments and lifestyle. This is entirely different than determining how much you may be pre-approved for. At Guild Mortgage, we believe in helping our clients build a secure financial future by educating them on real-world contingency planning. That means not committing to more mortgage than you can comfortably afford.
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There are some great tools on the web to help determine affordability according to geographic area. One of our favorite’s is Nerd Wallet’s Affordability Calculator.
But what’s important to understand is that while a mortgage calculator may allow you to enter property tax rates, insurance costs, and debt-to-income ratios, even affordability calculators cannot anticipate future needs, changes in circumstance, or your typical monthly living expenses.
For this reason, the simplest way to determine what you can really afford is to calculate the following:
- Realistic take-home earnings after health insurance premium copayments, Registered retirement portion deductions, and any other pre-tax deduction from your gross. Remember that health care costs will increase annually.
- Estimate and deduct average monthly tax and potential escrow cost of homes you’ve been looking at, including home owners insurance premiums
- Estimate and deduct your energy (gas, electric, and sewer charges) for the types of homes you’e looking at. Your area utility companies can give you averages.
- Estimate and deduct any automotive or student loans you’re currently paying. Assume in the future if you don’t currently have a car payment, that circumstances might arise whereby you do need to have debt-load ratio to finance a vehicle.
- Estimate and deduct any revolving debt payments you would have IF you used the maximum credit currently allowed on your revolving accounts.
- Estimate and deduct any auto, disability and life insurance premiums. Remember that as you age, life insurance premiums typically increase.
- Determine a monthly savings target in general, and to pre-fund things like vacation or future major acquisitions.
- If you plan to have children but have not yet had any, consider the impact of maternity leave and daycare costs on the household finances. Some couples prefer to plan for a mortgage that is viable on a single income.
“It’s best to ask yourself what your expenses might be three or more years from now. What is your current career trajectory — are you on the fast track, or are you destined for just cost-of-living raises, if that?” said Jonathan Arnold of Guild Mortgage.
Like his associate, Brian Ferrick, Jonathan will suggest that couples who qualify for a particular mortgage amount instead consider leaving some room for contingency.
“If on paper a client qualifies for $1,600 a month, I feel they’re better off trying to stay in the $1,200 range. That gives you a 25% contingency to account for the unexpected.”
Both Arnold and Ferrick agree that buying a house above your budget results in being “house poor” — and house poor is just poor.
“We encourage clients to develop a well-thought-out budget, and to know what their maximum monthly housing cost is.”
Thinking this sounds complicated? We can make it easy. Simply give us a call at (616) 918-6564 or Contact Us and we will do the math for you!