5 Factors Determining Mortgage Affordability
One of the common questions from people buying homes for the first time is “How much of the mortgage can I afford?” There are many factors that a lender will analyze before giving you an appropriate mortgage.
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 find out your gross income, add your regular salary to bonuses, commissions or tips, regular dividends, alimony/child support, and annual interest earnings. Divide the yearly sum by 12 to calculate your gross income per month.
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Home loan rate
Getting Down To Basics with Lenders
Mortgage rates change all the time and even an insignificant rise in rates can affect your purchasing ability. For example, if you bought a home with a 200, 000 dollars 30-year fixed rate mortgage with a 3.75% interest, your monthly payment would be 926 bucks.
If your interest rose to 4.25%, your payment each month would increase by almost $60.
Lenders use credit score to determine how risky a borrower is, which is why people with higher credit ratings typically get lower interest rates.
Even if your credit score is poor, you can still own a home, but your buying power could be affected if your loan partly affects your rate depending on your credit rating.
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 regular mortgage financing, the down payment must be 20 percent or more, otherwise private mortgage insurance, aka PMI will have to be added to the monthly payment. PMI helps protect lenders from people that may default on mortgages. Government-backed loans such as VA and FHA come with lower down payment requirements. Irrespective of which loan scheme you go for, you’re required to contribute some money upfront to finalize the transaction.
While you don’t need to be free of debt to purchase a home, auto loans, credit card debit, student loans and so on can affect your buying ability.
Most lenders advise that your monthly mortgage payment, which includes principal, interest, insurance and taxes be under 28% of your gross income per month. This is called front-end ratio.
Moreover, your lender will look at your back-end ratio (debt-to-income ratio), which comprises your monthly monetary obligations like alimonychild support, minimum credit card payments, auto loans, student loans as well interest, insurance, taxes and principal. Ideally, lenders advise that this shouldn’t be more than 36 percent of your gross earnings every month.