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Five Factors that Determine Mortgage Affordability

One of the most common questions first-home home buyers ask is “How much mortgage can I afford?” To give you an appropriate, a lender will look at a number of factors.

Income

Your earnings are an important factor that determines how much home loan you can afford. It’s recommended by lenders that your monthly mortgage cost be not more than 28% of your gross income monthly. To calculate your gross income, add your usual salary to commissions or tips, alimony or child support, bonuses, regular dividends as well as interest earnings yearly. Divide the yearly sum by 12 to calculate your gross income per month.
Short Course on Mortgages – What You Need To Know

Home loan rate
What You Should Know About Mortgages This Year

Mortgage rates constantly fluctuate and even a slight rise in rates may affect your ability to buy. For instance, a $200,000 home with a fixed mortgage rate of 3.75% for 30 years will require a monthly payment of $926.

If your interest rose to 4.25%, your payment each month would increase by almost $60.

Credit rating

Credit scores are used by lenders to determine the risk level of borrowers, so this is the reason why people who have higher credit scores usually get reduced interest rates.

Having a poor credit rating doesn’t necessarily end your dreams of owning a home, but if your type of loan partly affects your interest rate depending on your credit rating, it could restrict your purchasing power.

Down payment

You must have some money to use as a down payment if you want a mortgage. Down payment is simply a percentage of the whole price of the property that must be paid right away in cash, to bring down the mortgage amount. With standard mortgage financing, the down payment needs to be at least 20 percent, otherwise a home buyer will need to include private monthly insurance, or PMI to their monthly payment. PMI helps protect lenders from people that may default on mortgages. Government sponsored loans like VA and FHA have much lower down payment requirements. Irrespective of which loan scheme you go for, you’re required to contribute some money upfront to finalize the transaction.

Debt

Although you do not have to be free from debt to buy a home, student loans, credit card debt, car loans and the like can affect your purchasing power.

According to most lenders, your monthly mortgage expense, which includes principal, interest, insurance and taxes should be no more than 28 percent of your gross earnings per month. This is referred to as front-end ratio.

In addition, your lender will assess your debt-to-income ratio (back-end ratio), which comprises your monthly financial obligations including minimum credit card payments, student loans, alimonychild support, auto loans, as well as principal, taxes, insurance and interest. Ideally, lenders recommend that this be not more than 36% of your gross income per month.