How much mortgage you can afford
How much mortgage you can afford for a home mortgage depends on several factors, all of which are important. The amount of your income and what debts you have are two things that will be looked at closely. Your credit rating is another component, and how much – if any – you have saved for a deposit is yet another one.
To decide what amount you are eligible for, the lender calculates your debt to income ratio. This tells them how much of your total monthly income you must use to pay off your debts – and how much is left over. In simple language, if a lot of your income is used to pay off others debts then you won‟t have much left over to pay off the loan. In this case you either won‟t get a loan, or you won‟t get much of a loan. how much mortgage you can afford .
To borrow enough for a home you need to have a good income – or preferably two – not much other debt and at least some deposit. If you have no deposit, then the terms of your loan and your interest rate will be higher. But don‟t despair; because there are many aid programs out there to help low-income families get a home. how much mortgage you can afford .
The most used debt to income ratio is referred to as 33/38. What this means is that your housing costs should take no more than 33% of your total income, while adding the rest of the consumer debt you have should bring it up to no more than 38%. These guidelines are flexible depending on the amount of down payment you have and they also vary according to the lender. Some lenders allow a 29/41 ratio to qualify for a loan. how much mortgage you can afford .
So basically, how much you can borrow will depend on your debt to income ratio, your down payment and your credit history. You may find it easy to figure out what your income is per month, but if you are paid with a bonus or commission system as well as a wage, then it is a little more difficult. Lenders only calculate your income based on what you‟ve earned in the past, not what you are earning now. how much mortgage you can afford .
You will need the records of your bonuses from the last two years. You can work it out by looking at your W2 forms for the last two years. Add them up, divide the total by 24 and the answer will be your total monthly income. If you are self-employed your income must still be figured out using records from the last two years.
Working it out yourself will keep you a step ahead of the lender and you‟ll know what to expect when he starts to ask questions.
How Do You Qualify for a Mortgage
To qualify for a mortgage you need to at least have an income – one that is not being gobbled up by any other debt. That is not to say you cannot have any other debt.
It simply means that it should not exceed a certain percentage of your income. Remember that when you get a mortgage, you have to be able to pay it back. And you‟ll be paying back heaps more than you borrow because of the interest rate charged. When lenders start to examine your income, they like to be sure that they will get their money back. After all, that is what they lend it for; to make money through the interest.
If they think you are a risk, they will require you to take out loan insurance. This will be even more cost to you, but will ensure that they get paid. A person who is considered a risk will also have higher interest to pay. Your credit rating will be one of the things that a lender looks at to decide whether you are a risk or not. how much mortgage you can afford .
If you‟ve had a history of late repayments or even just one repayment that is late, their alarm bells start to ring. They believe that if a person has paid late once before they will be more likely to do it again.
Statistics show they are right. So if you‟ve had late repayments – even though it was through no fault of your own – then this will go against you in qualifying for a mortgage. It will not necessarily prevent you from getting one, but it will cost you in terms of interest and insurance. Having a steady job that you‟ve kept for at least two years will help you to qualify for a mortgage, especially if your income is a good one. how much mortgage you can afford .
If you‟ve changed your career in the past and are just starting out on a new one, this will go against you. What lenders are looking for is that rock solid steady employment history in the same line of work. They want you to be earning something like twice as much as the amount that you have to pay them back.
If a lender offers you much more than you expected or need, be wary. While you might have sudden visions of the beautiful home you‟ll now be able to afford, you will have to pay it back – if you can. The more the lender lends you, the more he will make; that is all some are interested in. Over-extending yourself is never a good idea.
The Importance of Your Credit Score and Where to Find it
Your credit score is one of the most important issues that a lender will take into account when deciding whether to lend you money. If you have lots of debt and late payments, then you will likely have a bad or poor credit score. Having a bad credit score will not prevent you from getting a loan, but it will make it harder and you‟ll have to pay more in interest and loan insurance. how much mortgage you can afford .
And in fact, your poor credit rating may not be your fault at all, but due to inaccurate late payments registered by credit bureaus. Take careful note of your payment history and get mistakes fixed immediately to keep your credit score squeaky clean. So where do you find out what your credit score is? Since no one can get by without money, everyone has a credit score. The score most used for larger loans is that developed by Fair, Isaac and Co, commonly called the FICO score.
Lenders apply to the three national credit bureaus, TransUnion, Fairfax and Experian to find out your credit score. You can do the same thing. You should get your credit score at least six months before you need to apply for your loan. This is because it takes up to three months or more to fix any mistakes that have been made on it. Then you need to have at least three months of good history to show. how much mortgage you can afford .
If you habitually make late payments without even realizing it, then you need to put in place a plan.You have a computer, you can set up your bank account to pay automatically at a certain time. If not, make sure of when your payments are due and mark the date on your calendar. You have a PDA, you can set it to remind you when to make the payments. These things will help your credit score to improve.
Another thing to help is to make sure you keep your balance under that credit card limit by at least 25%. If at all possible, pay off the credit card debt you have completely, before applying for the loan. The amount of money you owe on your credit card is a vital factor in your credit score. So don‟t get down about having a poor credit score, these are things you can do to improve it. Get cracking and make a new start. You‟ll be glad you did.
What is Mortgage Pre-Approval and Do You Need One
To get pre-approval for a mortgage the lender must closely examined your credit history and affirm that you qualify for a loan. He will tell you what sort of mortgage you qualify for and discuss interest rates. Better still, he will tell you the amount of loan you should be able to get. While this pre-approval is not a firm offer of a loan, it lets you go shopping for a home with more confidence, because you know that the lender will look on your formal application with favor.
Since you now have a specific amount of money in view, you can narrow your choices down to fit in with the amount of the loan. The pre-approval differs from pre-qualification. To run a pre-qualification check, the lender does not look closely at your credit history. It is only a general look at your debt to income ratio.
You can do this yourself using the many online calculators available. Or you can get your real estate agent or a lender to do it for you. Loan terms and interest rates don‟t figure in the pre-qualification equation. To get loan pre-approval, you‟ll need to talk to the lender and put in an application. The lender will need all the details of your financial history and your permission to make a credit search. Once you have pre-approval for a home loan, then the seller will be more than likely to accept your offer to buy. how much mortgage you can afford .
When the buyer‟s market for homes becomes competitive, as it is these days, a pre-approval may be just the thing to give you an edge in buying the home of your dreams. You can often apply for pre-approval online. This usually results in an agent contacting you to set up an appointment. Only by actually talking to you and examining all your details can the agent judge whether to give you pre-approval.
Pre-approval is not a binding agreement on either side. It simply means that your home loan application would be looked on with favor by the lending institution. And from your side, you could go to another lender for the mortgage you want, instead of staying with the one who gave you pre-approval. You will then have to present all your credit history again. You may want to do this if a long time has elapsed before you can find the house you want and the financial climate has changed. Then you might find a better deal through a different lender.
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