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Five Factors that Determine 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. Income The amount you earn is a key factor that determines how much mortgage you can afford. According to lenders, your cost of monthly mortgage should be no more than 28% of your gross earnings 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. To arrive at your monthly gross earnings, divide the annual amount by 12.
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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 interest rose to 4.25%, your payment each month would increase by almost $60. Credit rating 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. 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 protects lenders from buyers that may default on home loans. 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 While you don’t need to be debt-free in order to purchase a property, credit card debt, car loans, student loans etc. can limit your buying potential. 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 what’s known as 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.