Compliant loan limits are higher in 2022, but how much should you borrow for a home?

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There is a difference between what you can borrow and what you should borrow.

Key points

  • By 2022, compliant loans peak at $ 647,200 in most of the country and $ 970,800 in high-cost areas.
  • You may need to keep your mortgage at a much lower number.

It’s no secret that home values ​​have increased nationwide. In October, they were up 17.4% from the previous year, according to the Federal Housing Finance Agency.

So it’s no surprise that compliant loan limits will be raised in 2022 to account for higher home values. This year, compliant mortgages peak at $ 647,200 in most of the United States. In higher cost areas, they can go up to $ 970,800.

But while homebuyers who want a compliant loan may have the option to borrow more this year, that doesn’t mean they should. Here’s how to find out how much money you can safely take out on a mortgage.

Don’t worry about a mortgage

As a general rule, it’s a good idea to keep your monthly housing costs at 30% or less of your take-home pay. These costs include items such as:

  • Mortgage payment
  • Property taxes
  • Home insurance
  • Private mortgage insurance payments, if applicable
  • HOA fees, if applicable

Let’s say you bring home $ 4,000 a month. This means that you shouldn’t be spending more than $ 1,200 per month on housing. If you’re making a 20% down payment on your home, you won’t have to worry about private mortgage insurance. And if you don’t buy a home from an HOA, the HOA fees won’t apply to you.

But you’ll still need to keep your mortgage payment, property taxes, and home insurance at $ 1,200 or less. If you search for homes in your target neighborhood based on your price range and find that you are looking for around $ 200 per month in property taxes and $ 80 per month in home insurance costs, you have $ 920 left that you can afford. allow spending. on a mortgage. In this case, you can use a mortgage calculator to determine how much of a home loan you can afford.

What happens if you borrow too much?

You may be familiar with the term “poor house”. This is a scenario that occurs when so much of your income is spent on housing that you have little left for your remaining bills.

If you take out too many mortgages, you risk not only impoverishing your home, but also getting into serious debt. It could also put you at risk of losing your home entirely.

Since compliant loan limits are on the rise this year, there may be a temptation to borrow more money for a home than you normally would. But before you go down that road, calculate the numbers and aim to stick to that 30% threshold.

Remember that the loan amount you are allowed to borrow is not necessarily the amount you should to borrow. Although your mortgage lender looks at different factors, such as your credit rating, existing debt, and income, to determine how much loan you qualify for, you may have other expenses that your lender is not aware of. Or, you may have new expenses coming up. If you have a baby on the way and you plan to spend $ 1,000 per month on child care for that child, it changes your financial situation dramatically.

That’s why your best bet is to do your own math and err on the side of borrowing carefully. The last thing you want to do is take up too much space and then regret it.

A historic opportunity to potentially save thousands on your mortgage

There is a good chance that interest rates will not stay at multi-decade lows any longer. That’s why it’s crucial to act today, whether you want to refinance and lower your mortgage payments or are ready to pull the trigger to buy a new home.

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