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How Much Can I Borrow? A Guide For Calculating Your Mortgage
Before you begin shopping for a new home, you should make sure to have some idea of what you can afford, which will answer a frequent new home owner question: How much can I borrow? It will save you a huge amount of time and stress by making sure you are looking in the correct price range for you. Mortgage calculators such as Lender 411's are an extremely helpful tool in this endeavor. Three main factors decide ultimately how much you can borrow for a house:
The general rule of mortgage lending is that housing expenses should not exceed 25 percent to 28 percent of the homeowner's gross monthly income. These housing expenses are defined as monthly mortgage principal, interest payments, homeowner’s insurance, and property taxes. For Federal Housing Administration--or FHA--loans, this figure cannot exceed 29 percent of the homebuyer's gross monthly income. If you're not sure of what your property taxes or homeowners insurance will be, which can be difficult to calculate on your own, we have some median statistic you can use as reference. American Housing Survey data reports that the median annual taxes per $1,000 value is an average of $12, and that the median property insurance monthly averages $30. Income Steady employment will be your main source of income, but you can also add:
Long Term Debt All your regular monthly debts and obligations will also be considered, whether other real estate loans, revolving accounts, installment loans (bank loans, auto loans, tuition loans, etc), alimony and/or child support. Remember that your housing expenses combined with long-term debts should not be more than 33 percent to 36 percent of your gross monthly income. For FHA loans, this figure should not surpass 41 percent of the homebuyer's gross monthly income. Long-term debt is typically defined as monthly expenses extending more than 10 months into the future. We recommend that you pay off as much debt as possible, long and short term, before you apply for a mortgage. Knowing what monthly mortgage payments you can afford will greatly benefit 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 mortgage for you, whether it's a 30 year fixed rate mortgage or a 5/1 adjustable rate mortgage. Down Payment When you apply for a mortgage, it's usually expected you'll have enough money at your disposal to make the down payment, which is typically up to 20 percent of the asking price for the house and coverage for closing costs--which are 3 percent to 6 percent of the loan amount. Savings, stocks and bonds, mutual funds, employee savings plans, or Individual Retirement Accounts can all be used as sources for a down payment. Sometimes, you may be allowed to use a gift of money from parents or relatives, or even grants from a nonprofit housing assistance organizations for a part of your down payment. If you put down less than the 20% most lenders require, you will likely have to obtain private mortgage insurance (PMI). PMI allows you to qualify for a mortgage loan with a down payment as low as 5 percent. You can also consider an FHA loan, which can have a down payment as low as 3 percent. FHA loans also sometimes allow closing costs to be wrapped into the mortgage. Calculate your mortgage amount carefully, and you'll not only know how much you have to work with, you'll be another step closer to the home of your dreams. |
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