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5 Factors Determining 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.

Revenue

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. To arrive at your monthly gross earnings, divide the annual amount by 12.
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Mortgage rate
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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 buy a home worth 200,000 dollars with a fixed interest rate of 3.75% for 30 years, you will need to pay 926 dollars every month.

If your rate was increased to 4.25%, your monthly payment would go up by almost 60 bucks.

Credit score

Lenders use credit score to determine how risky a borrower is, which is why people with higher credit ratings typically get lower interest rates.

Having a less than perfect credit score does not necessarily mean you can’t own a house, but if your kind of loan partly determines your interest depending on your credit score, your purchasing power could be restricted.

Down Payment

To get a mortgage, you must have money available to use as a down payment. Put simply, a down payment refers to a fraction of the price of the house that must be paid in cash upfront, which decreases the mortgage amount. With traditional mortgage financing, your down payment must be at least 20%, otherwise you’ll need to include PMI (private mortgage insurance) in your 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. No matter which kind of loan you opt for, you must make some upfront cash payment to complete 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 referred to 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 recommend that this be not more than 36% of your gross income per month.