Mortgage debts – Factors which can drastically affects your affordability part 1

Hi folks…Hope you are enjoying my posts, In this post I have tried to provide you as much information as possible about mortgage affordability within a concise version. If there is any modification required, regarding my information or my writing, please don’t hesitate to post your suggestions.

It doesn’t matter where you reside, how much is your monthly income or the type of home you are looking for. Whenever your seller makes the price quote, you’ll be surely reacting something like this – “My god! too much price it is” You are right, eventually. In today’s market, prices are rising much quicker than you can imagine, mainly in the 5star areas named – New York, Boston, Las Vegas etc. In those places, even homes with small areas will be carrying high price tags.

Normally, most of the potential home buyers can easily afford a mortgage loan which costs more or less 2 or 2.5 times more than their gross earning. According to this concept, an individual can afford a mortgage between $400,000 and $450,000, if he has the income of $200,000 per year.

Finally, for getting a mortgage loan, you surely have to consider few deciding factors. Initially, you need to understand what your lender thinks about your affordability. The lender would always want to gain a perfect assumption about the size of the mortgage which they can approve for their clients. Lenders for this reason normally uses typical formulas which are little complex for a common man to get through. Next, you need to determine your own criteria by an evaluation process so that you have a precise idea about your finances by keeping your preferences intact.
Criteria of the Lender : Debt-to-Income Ratios
From a lender’s eyes, your affordability to buy a home depends upon the below given factors:

1. Front-End Ratio – The percentage of your yearly gross income which you will be paying towards your monthly mortgage payments is called the front-end-ratio. You might know that your monthly payment has 4 crucial parts, those are – principal, interest, taxes and mortgage insurance. There is a good rule regarding the mortgage insurance part, it should not exceed 28% of gross earnings. Sometimes, many lenders allows borrowers to cross the limit to 30%, and even exceed 40%.

2. Back-End Ratio – The debt-to-income ratio (DTI) is also called Back-end-ratio. It calculates the percentage of your gross income which is required to manage your debt payments. These debt payments may include your credit card payments, mortgage, child support and any other loan payments. Most of the lenders would recommend you to maintain DTI less than 36%. According to the ratio, if you want to calculate your monthly debts, you should multiply your gross earning by 0.36 and divide by 12. For example, if you income is $200,000 per year, maximum monthly debt you may have is $6,000.

3. Down Payment – As down payment you must provide 20% of your home value, it will reduce the requirement of mortgage insurance. Many lenders lure the buyers by letting them purchase a property with small down payments. The down payment has a direct impact on your mortgage payment. The bigger your down payment will be, the interest rate will be lower. Larger down payments gives buyers the chance to go for more expensive properties.

To be continued…