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How Much Can You Afford to Borrow?
Mortgage Library: Loan Application Process: Prequalification: How Much Can You Afford to Borrow?
|Before you start looking at homes, you need to have some idea of what you can afford. It can save
you much time and trouble by making certain you are looking in the correct price range.
There are three main factors that will weigh into how much home you can ultimately afford:
Income. Lenders generally say that housing expenses should not exceed 25 percent to 28 percent of the homeowner's gross monthly income. The housing expenses include monthly mortgage principal, interest payments, property taxes and homeowner’s insurance. For Federal Housing Administration (FHA) loans, this figure is not to exceed 29 percent of the homebuyer's gross monthly income. If you have no idea of what your property taxes or homeowners insurance will be, the following median statistical meanings can be used. According to the American Housing Survey data the median annual taxes per $1,000 value averages $12. The median property insurance costs per month averages $30.
You can count as income not only your steady employment but also:
Debts. Lenders also take into consideration your regular monthly debts and obligations: other real estate loans, installment loans (bank loans, auto loans, tuition loans, etc), revolving accounts, alimony and child support. Your housing expenses plus long-term debts should not be more than 33 percent to 36 percent of your gross monthly income. For Federal Housing Administration (FHA) loans, this figure should not to exceed 41 percent of the homebuyer's gross monthly income. Lenders usually define long-term debt as monthly expenses extending more than 10 months into the future.
It is recommended that you pay-off as much debt as possible before you apply for a mortgage.
Having the idea of what monthly mortgage payments you can afford will help you in determining the maximum loan amount you can borrow. With our Mortgage Calculators you can determine the maximum mortgage amount for loan terms you desire.
Having the idea of what monthly mortgage payments you can afford will also help you decide the right kind of mortgage for you. For example, a 15-year fixed-rate mortgage requires higher monthly payments than a 30-year loan.
Down payment. Lenders expect homebuyers to have enough money available to make the down payment - usually up to 20 percent of the asking price for the house and to pay closing costs (3 percent to 6 percent of the loan amount). You may consider the following sources for a down payment: savings, stocks and bonds, mutual funds, employee savings plans, Individual Retirement Accounts, etc. Some mortgage programs allow to use a gift of money from parents or relatives that need not be repaid or grants from a nonprofit housing assistance organizations for a part of your down payment.
If you don’t have enough money for downpayment that most lenders require, you may obtain Private Mortgage Insurance. It allows you to get a mortgage loan with a down payment as low as 5 percent. You can also consider an FHA or VA loan, or RHS program. Down payments on FHA loans can be as low as 3 percent, and closing costs can be wrapped into the mortgage, but FHA loans cannot exceed the statutory limit. RHS and VA loans usually require no down payment but they are only available for eligible applicants.
In recent years, Fannie Mae and Freddie Mac have also introduced low down payment programs.
Your local government may support other homebuying programs in your area. You may be able to find out more information about local homebuying programs on your city's home page.
The Pledged Asset Mortgage allows a prospective home buyer who has sufficient income to meet monthly payments toward a home, but who cannot save the necessary down payment, to borrow up to 100 percent of the sales price when a family member pledges a stable financial asset equal to 30 percent of the loan amount.
Thus we consider the main factors that will weigh into how much home you can ultimately afford, but virtually affording a home involves more than having enough money to cover the down payment, closing costs and monthly mortgage obligations. Maintaining the overall condition of the home while you live in it and the repairs go beyond the monthly mortgage payments. You will have to pay for utilities and heat. If you are required to become a member of a neighborhood homeowner association, the dues or periodic assessments payable to the association may be a significant expense item. So, when determining how much home you can afford, make allowances for such expenditures.
According to the American Housing Survey data the median monthly cost paid for:
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