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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?” To give you an appropriate, a lender will look at a number of factors. Income The amount you earn is a key factor that determines how much mortgage 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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Mortgage rate
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Mortgage rates constantly fluctuate and even a slight rise in rates may affect your ability to buy. For instance, a $200,000 home with a fixed mortgage rate of 3.75% for 30 years will require a monthly payment of $926. If your rate rose to 4.25%, the monthly payment would rise by almost 60 bucks. Credit score 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. 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. 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 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-backed loans such as VA and FHA come with 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 free of debt to purchase a home, auto loans, credit card debit, student loans and so on can affect your buying ability. 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 recommend that this be not more than 36% of your gross income per month.