Five Factors that Determine Mortgage Affordability
One of the most common questions first-home home buyers ask is “How much mortgage can I afford?” There are various factors that lenders analyze before approving an appropriate mortgage.
The amount you earn is a key factor that determines how much mortgage you can afford. Lenders advise that your monthly mortgage cost shouldn’t exceed 28% of your gross earnings per month. 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 total by 12 to arrive at your gross monthly earnings.
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Mortgage rates constantly fluctuate and even a slight rise in rates may affect your ability to buy. 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 rate rose to 4.25%, the monthly payment would rise by almost 60 bucks.
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.
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 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 protects lenders from buyers that may default on home loans. Government sponsored loans like VA and FHA have much lower down payment requirements. No matter which kind of loan you opt for, you must make some upfront cash payment to complete 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 say that your monthly mortgage cost, which comprises principal, interest, as well as insurance and taxes should not exceed 28% of your gross earnings each month. This is called 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 advise that this shouldn’t be more than 36 percent of your gross earnings every month.