Posted on: February 3, 2014
Many factors determine how much money you are comfortable spending each month on a home.
“How much can I afford for a house when I buy with a VA home loan?”
That’s a huge question first-time and seasoned homebuyers ask. There are various online calculators and estimating tools that can give you a general idea of future payments. But in addition to the simple mathematics of the process, there are some important elements of which you need to be aware, such as debt ratio and qualifying income.
But the most important, you need to have peace of mind when buying a home.
Peace of Mind Test
Many times, borrowers find out they can qualify for much more than they’re comfortable paying each month, especially if they’re used to rent payments much lower than their qualifying payment amount.
For example, just because you can afford (on paper) to have a $5,000 mortgage payment doesn’t mean you have to take the maximum. Especially if you’re used to paying $2,500 in rent. Lenders have a term for this and it’s called “payment shock.” Payment shock is the amount of increase from your current housing expense to your proposed monthly housing payment. Payment shock of 150% or more can mean it will be harder to qualify for the loan.
Only you can tell whether or not a payment feels comfortable. Take heed to those feelings. If you think that you don’t want to be lying awake every night worrying about your mortgage payment, tell your lender what you feel comfortable paying and let the lender work backward to come up with your maximum purchase price.
Whether by confidence or necessity, some choose to borrow the maximum the bank will hand over. If this is you, you’re really not asking how much home you can afford but instead how much you can borrow. Lenders calculate this amount based upon your debt-to-income ratio, or simply, “debt ratio.”
VA home loan lenders typically like to see your total monthly obligations not exceed 41 percent of your gross monthly income.
However, there are exceptions. The VA computerized underwriting system that most lenders use may approve you for a higher debt ratio if you have good credit, are making a down payment, or have assets in reserve.
But, assuming a 41 debt ratio is a good target to shoot for, you’ll add up your total monthly credit obligations, including proposed housing costs, and see how that compares with your income.
For example, say you and your spouse’s gross monthly income is $4,800. A lender multiplies $4,800 by .41 to yield $1,968, the total amount allotted to service monthly debt. Now say you have a car payment of $250 and student loan payments adding up to $100 per month. By subtracting those two values, you have $1,618 available for a housing payment.
Assuming $260 per month in property taxes and homeowner’s insurance there’s $1358 left over for principle and interest per month.
Your lender then works backward to find a maximum loan amount. In this example, with a 30 year fixed rate at 4.0% (4.22% APR) you would qualify for a purchase price of about $278,500 with a zero-down VA home loan. Of course, this assumes VA eligibility. adequate credit score, and other qualifying factors.
Factors that Affect Affordability
There are four basic elements to a mortgage payment: loan amount, interest rate, payment and loan term. Each affects the other. Obviously, the higher the interest rate the higher the monthly payment, directly affecting your affordability. Yet there are ways to increase your buying power that directly impact how much home you
If your debt ratio is too high but you still want to buy in a particular neighborhood, simply borrow less. That might sound a bit too simple but in reality if your debt ratio is too high a lender won’t approve your loan application anyway.
To lower your loan amount, sock away more money before you buy. Get a gift from a relative to help you with your down payment. Or, many states and locales have special down payment assistance grants and loan programs that can help lower your loan amount.
Certain retirement accounts can be borrowed against, such as a 401(k) account (we’re not recommending this, but simply giving ideas here). You can even sell certain appraisable assets for cash to close such as antiques, an automobile or any other item that can have a value assigned by a professional appraiser.
Ask the seller to pay for closing costs and use the money you would have spent there and make a small down payment.
VA Mortgage Rate
If your debt ratio is on the cusp and just a tad too high, see what paying a discount point can do. A discount point is a fee that reduces your interest rate, thereby lowering your monthly payment.
When you make an offer on a house, request that the seller pay your closing costs. This may free up cash to put toward a discount point that will bring the rate down.
Loan Term (Length)
If you select a loan with a shorter amortization period, or loan term, your monthly payments will be higher compared to loans with longer terms. Lenders typically offer mortgage rate terms in five year increments from 10 to 30 years.
If you’re looking at a 15 year fixed rate but the payments are too high, a 30 year fixed rate payment can reduce your monthly payment dramatically.
Since income is half of your debt ratio calculation, make sure you’re counting all your income. Remember first that lenders use your “gross” monthly income when figuring a ratio. When estimating how much you can afford, don’t look at your take home pay at the bottom of the check. Use the amount before any withholdings are deducted. (However, keep in mind that alimony and child support deductions need to be counted against you.)
Tip: if you get paid every other week (bi-weekly), your gross monthly income is tabbed differently compared to someone who gets paid twice a month, for instance, on the 15 th and 30 th. If you get paid $2,500 every other week, your gross monthly income is actually $2,500 X 26 (pay checks per year) divided by 12 (months) = $5,416, not $5,000. That extra $416 can make a big difference.
If you have other household income, like a side business that has been around more than 2 years and is profitable, you may be able to use this income to qualify. Ask you loan officer about your income situation.
How Big of a VA Mortgage can You Afford?
In the end, you are the first and last word in this decision. Don’t let a loan officer push you into more of a mortgage than you want to afford. However, do listen to him or her for reasons that you may be able to pay more than you think (for instance, the tax advantage you enjoy as a homeowner). But in the end, it’s better to be safe than sorry.
I’m Ready to Apply
Speak to one of our VA home loan professional about how much you can afford. Call 866-437-7385 or simply complete a one-minute contact request form .