When it comes to getting a mortgage, finding the right option with an affordable rate is essential. But how do you know when to draw the line on what you can afford?
In this article, we’ll outline the differences between gross income and net income and how they can help you determine your loan affordability.
What’s the Difference Between Gross Income and Net Income?
Gross income is the total amount of money that you earn before any deductions are made. It includes all sources of income including hourly wages, salaries, tips, bonuses, and even self-employment income. Just remember: gross income is your earnings before taxes and other deductions.
Net income, on the other hand, is your total income after taxes and other deductions have been taken out. This is the money that you actually have available to spend on various expenses, including mortgage payments. Because of the deductions, net income is usually much lower than gross income.
Find a Total Mortgage loan expert near you or check your loan eligibility to see exactly what your income can afford.
Which Form of Income is Better for Calculating Mortgage Affordability?
Now that we understand the differences between gross and net income, let’s discuss which is better for calculating mortgage affordability.
The short answer? Both. But realistically, your net income will give you a better understanding of what you can actually afford.
When you apply for a mortgage, your lender will use your gross monthly income to determine an appropriate loan amount. However, that doesn’t mean that you should rely on it entirely when deciding how much you want to spend (and how much you want to pay each month).
While your gross income helps lenders determine the size of your loan, your net income is what really matters. Because net income is your take-home amount after deductions, it is naturally more realistic to use it when calculating mortgage affordability. You can calculate your own net income here.
Another important factor to consider is your debt-to-income ratio (DTI). This is the percentage of your gross monthly income that already goes toward debt and is a value that lenders will look at when approving you for a mortgage. Most lenders say that your total monthly debt – including your mortgage payment – should total no more than 43 percent of your gross monthly income. Again, that’s your income before any deductions are made.
If you’re still unsure about your options, Total Mortgage has loan experts across the country who can talk by phone and assess your unique situation. Contact one today.
Your Next Steps With Total Mortgage
Now that you’re familiar with gross income, net income, and how they affect the mortgage process, it’s easy to get started.
Browse Total Mortgage’s catalog of loan products or find an expert near you for more information.
Source: totalmortgage.com