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5 Factors that Affect Mortgage Affordability One of the most common questions first-home home buyers ask is “How much mortgage can I afford?” There are many factors that a lender will analyze before giving you an appropriate mortgage. 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 work out your gross income, add tips or commissions, child support/alimony, bonuses, regular dividends, and annual interest earnings to your regular salary. 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 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 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. Even if your credit score is poor, you can still own a home, but your buying power could be affected if your loan partly affects your rate depending on your credit rating. Down Payment To get a mortgage, you must have money available to use as 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 sponsored loans like VA and FHA have much 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 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 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 called front-end ratio. In addition, your lender will assess your debt-to-income ratio (back-end ratio), which comprises your monthly financial obligations including minimum credit card payments, student loans, alimonychild support, auto loans, as well as principal, taxes, insurance and interest. Ideally, lenders say that this should not exceed 36% of gross earnings per month.

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