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Five Factors that Determine Mortgage Affordability “How much mortgage can I afford?” is one of the most common questions first-time home buyers ask. There are many factors that a lender will analyze before giving you an appropriate mortgage. Earnings Your earnings are an important factor that determines how much home loan you can afford. According to lenders, your cost of monthly mortgage should be no more than 28% of your gross earnings 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 sum by 12 to calculate your gross income per month.
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Mortgage 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 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 poor credit rating doesn’t necessarily end your dreams of owning a home, but if your type of loan partly affects your interest rate depending on your credit rating, it could restrict your purchasing power. 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. Private mortgage insurance helps protect lenders from borrowers that could default on mortgages. Down payment requirements for government-sponsored loans like VA and FHA are much lower. Regardless of which loan program you choose, you must contribute some cash upfront to finalize the deal. Debt Although you do not have to be free from debt to buy a home, student loans, credit card debt, car loans and the like can affect your purchasing power. 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. 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.