Q:

Do The Math: how much mortgage can I afford?

A:

Quick Answer

Determine the amount of mortgage that is affordable to avoid financial problems in the future. There are various factors to consider in determining the amount of mortgage that is affordable.

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Full Answer

Some of the factors include total household income, monthly debts and the amount of savings available for a down payment. A good rule of thumb is to have three months of mortgage payments and monthly expenses, notes Forbes. This leaves an adequate amount of time to deal with uncertainties.

Factors That Affect Mortgage Affordability

Income
One of the biggest concerns for mortgage companies is the ability of borrowers to repay their loans. A steady stream of income can facilitate the repayment of a mortgage. Mortgage companies consider borrowers’ debt-to-income ratios to determine if they are capable of repaying their loans, notes the Consumer Financial Protection Bureau. Borrowers who are unemployed may be subjected to additional scrutiny to determine their income sources and eligibility for the mortgage. When it comes to applying for a mortgage, inconsistent usually translates to more paperwork and scrutiny.

Assets
To qualify an individual for a mortgage, lenders consider the worth of the individual’s assets. Examples of assets include cash, retirement accounts and investments. Other factors that are considered assets but may not be considered as security for a mortgage include personal property, real estate property, privately held stock or options and cash on hand.

Debt
Mortgage companies also consider the cash that a borrower remains with after paying current debts. Some expenses recur on a monthly basis and are not necessarily considered debts, according to the United States Federal Housing Administration. To determine if a borrower is eligible for a mortgage, lenders consider the borrower’s existing property payments, credit card debt, student loans, auto loans, personal loans, child support and any court-assigned debt. Some common monthly payments that are not considered include cell phone payments, voluntary memberships, donations and business debts.

Cash to Close: Down Payment and Closing Costs

Down Payment
This can be anywhere from 0 percent in some cases to 25 percent or more notes the college investor. There are several mortgage products designed for people with limited cash for a down payment. A loan is considered riskier if the down payment that has been paid is low. Mortgages with low interest rates may accumulate high costs including mortgage insurance costs.

Closing Costs and Fees
Borrowers can expect to pay two to five percent of the value of their properties in closing cost excluding the down payment. Cash-strapped buyers may have to consider taking mortgages with higher interest rates.

Credit Score
Much attention is placed on borrowers’ credit scores because it has to be good enough to justify getting a loan. Credit score also determines the interest rate that will be paid by a borrower, notes Bankrate. Some credit scores have minimal effects on borrowers’ eligibility for a loan. Although borrowers’ credit scores may not have a direct effect on the affordability of their mortgages, it has an effect on their interest rates. Borrowers with good credit scores should check their credit scores regularly to ensure that they maintain the scores at levels that will affect their loan interest rates or eligibility for another loan.

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