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5 Factors that Affect 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 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. 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 change and even a small increase in rates can affect your buying ability. 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 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 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. 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 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 say that this should not exceed 36% of gross earnings per month.