Lessons Learned About Mortgages

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. 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. Divide the yearly total by 12 to arrive at your gross monthly earnings.
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Home loan rate
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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. 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 If you want a mortgage, you must have some money set aside for making a down payment. 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 protects lenders from buyers that may default on home loans. 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. 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 what’s known as front-end ratio. Also, your lender will review your back-end ratio, or debt-to-income ratio, which consists of your monthly financial obligations such as student loans, minimum credit card payments, child support/alimony and car loans as well as your principal, interest, insurance and taxes. Ideally, lenders advise that this shouldn’t be more than 36 percent of your gross earnings every month.