Buying a home can require a huge capital investment, financially and emotionally. People may use all their savings and most parts of their income to land their dream home. After all, this is what everyone cherishes in life, the American dream per-say. However, a person planning to buy a house has to ask himself; “how much house can I afford?”. The individual’s ability to afford a house is decided, not by the prospective home buyer but it is the job of the mortgage lender to decipher one’s mortgage limit and buying capabilities. There are several factors that determine home affordability. Some of them are given below.
Determining the factors of home affordability:
Qualification ratios are one of the primary factors of determining the mortgage limit. Here is how the factors break down for approving the real estate loan limit for a person.
Backend Ratio: AKA your ‘Debt-to-income ratio’. Banks and mortgage lenders will need to determine how much of your income is being allocated to repay your other debts like existing mortgages, credit card bills, medical expenses, car payments, etc…. Banks are looking for a debt-to-income ratio that does not exceed the 36% range. So if you need to get a quick idea of your ratios then you can make use of several free online debt-to-income tools, calculators and similar widgets. This will give you a general idea about your home affordability.
Front End Ratio: This is also known as your housing expense ratio. This will be used by your creditors to determine the amount of money you will spend towards making the actual mortgage payments. The amount paid will encompass what is referred to in the industry as PITI, which stands for ‘Principle, Interest, Taxes & Insurance’ and any other obligatory charges. A suitable home expense ratio should not exceed 28% of what you earn.
Credit Rating: Banks and Mortgage lenders will review your credit report before they approve your loan. Credit history and credit score play a vital role in deciding whether or not you are eligible for a loan. Based on your credit score and history, your prospective mortgage lender can evaluate the loan limit.
Financial Duties: Besides the above factors, mortgage lenders will verify whether or not you are regular in paying your taxes and other financial obligations such as child support or alimony if applicable. You will have to provide your tax returns to verify your income and establish your source of income.
Getting a mortgage isn’t that daunting but it is not always that easy either, especially if it is a second mortgage, but that is another article. So contact your Mortgage Lender today to discover “how much home you can you afford”, this will give you a sound idea about what and where you can start looking to buy your next house.
Disclaimer; This is solely an informative guest post by Peter Harper on the ‘Idaho Real Estate Blog’ and not an endorsement of services.