When shopping for a mortgage, many potential mortgage borrowers are confused as to how much of a mortgage they can really afford and what they will be approved for. In year’s past, many mortgage lenders were quite generous with how much they would lend to a mortgage borrower. Due to the high rate of mortgage defaults and foreclosure, many mortgage lenders have decreased the level of mortgage that they are willing to give to a borrower.
The main aspect that mortgage lenders use into determining how much of a mortgage someone can realistically afford is determining their monthly debt to income ratio. As a general rule, most mortgage lenders now prefer that a borrower’s total monthly housing payment be less than 30% of their gross monthly income. This means that if a borrower makes $120,000 per year, or $10,000 per month, the most their monthly housing payment could be is $3,000 per month.
When determining how much of a mortgage that they could realistically afford, a borrower also needs to take into consideration the other expenses that are associated with owning a home. These expenses include taxes, assessments, property insurance, and general maintenance. If the borrower puts down less than 20%, they will also need to factor in private mortgage insurance costs. Using the same example as above, if these other expenses were to cost $750 per month, the largest mortgage payment that the borrower could qualify for would be $2,250 per month.
Once it is understood what payment a borrower could qualify for, they will have a better understanding of how much of a mortgage they could afford. Based on current mortgage rates of around 5.25% for a 30-year mortgage, a borrower could afford a mortgage of around $410,000. However, if the mortgage broker offered a higher interest rate of 6%, the borrower’s affordability would fall to $375,000.
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