A person thinking of mortgage pre approval would like to know how much mortgage they can afford. This prepares them from extremely costly monthly expenses. Others would like to know this value then set a lower mortgage to ensure they won’t spend a lot of money and retain balance in their finances. Several elements can give people an idea about the amount they can afford.
Yearly or Monthly Income
A person’s monthly and yearly income is important in knowing mortgage affordability. Both income should be stable to allow a person to pay his mortgage without problems. The higher income means a person can afford higher mortgage than those with smaller yearly salaries.
For some, a stable and higher monthly income will also be useful for paying monthly mortgage payments. People applying for mortgage not only has to pay their home loans, but also other loans. A regular monthly income ensures all these fees are paid while leaving enough for paying monthly supplies, utilities, and others.
Debt-salary or debt-income ratio refers to the percentage of debts paid monthly against the amount of money made for the month. To get this value, a person must get the total value of loans and credit card bills. Divide the total amount of loans paid monthly then divide it with the total amount of monthly income. So, if the total amount of debt is $2,800 is divided by a total income of $10,000 results to 28 percent debt-salary ration. Ideally, this ratio should be lower to serve an assurance that an individual can pay for his mortgage without problems.
Credit history may only appear as a simple rating. However, a person with high credit rating means he can completely deal with mortgage since interest rates will be much lower than those asked from people with low credit rating. This is the main reason why a lot of people would wait for their ratings to level up first before applying for mortgage. An ideal credit rating is around 740 or higher to take advantage of lower interest rates.
Aside from a good credit rating, the entire credit record should remain clean to ensure good impression left on mortgage lenders.
Downpayment prices play a crucial role in getting affordable home loans. A person needs to pay for the downpayment while the mortgage will deal with the entire property’s amount. A buyer who can pay higher downpayments will have cheaper monthly loan payments. Lower loan payments mean low interest rates that will save buyers money later on. Lenders would usually ask buyers to pay 20 percent of the property price as downpayment, but the latter can choose to pay lower is preferred or if their budgets are insufficient.
Mortgage term is the duration of loan payments before it will be completed. Some may choose to pay 30 years or shorter depending on what they can afford. Longer mortgage term means cheaper monthly payments. However, longer mortgage terms would result to higher interest rates, which can become experience after summing up all the payments. This is a good option for those who want to save monthly on their payments rather than paying for shorter terms with higher monthly payments.
Front- and Back-End Ratios
Front- and back-end ratios refer to the percentage of loans against the monthly income before the taxes. Front-end ration refers to housing-related debts like mortgage, principal, interests and others. The ideal percentage for this ratio shouldn’t exceed 28 percent of monthly income before taxes. Although this is not the standard percentage, it’s a good sign that a person can deal with mortgage without significant financial burden.
On the other hand, back-end ratios refer to other debt obligations including housing loans. Lenders would recommend 36 percent or lower of monthly income to cover for these monthly financial obligations as a sign that borrowers can pay for their mortgage.
Lenders don’t count loan applicants’ lifestyle to approve or reject mortgage applications. Nevertheless, buyers can use this as their personal metrics in knowing whether they can deal with additional financial obligations. A person who tends to spend more than what he can actually afford may have problems dealing with mortgage. Those who earn more, but are able to maintain good financial lifestyle shouldn’t have any problem paying their mortgages together with other financial obligations.
Overall, several factors contribute to knowing how much mortgage a person can afford. Considering these elements plus lenders’ offers, a person will get the best mortgage rates that will be useful for everyone who would like to own a house.
Max is a native Phoenician who is working as one of the stuff at The Eddie Mortgage Team with over a 6-years of experienced as SEO Specialist.This author has published 5 articles so far.