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Guidelines to Determine How much Mortgage You Can Borrow

by Allen Smith

If you’re planning to buy a house, you must be giving a lot of effort to search for the perfect house. Equal attention should be paid to this question –“mortgage how much can I borrow?” Lenders have their own criteria to determine how much a borrower can afford and based on that they can offer you a mortgage. It is also very important that you yourself have a clear understanding of your financial affordability. If you take out a mortgage which is beyond your financial capability, you can face severe financial difficulties. This article attempts to guide you in understanding how much mortgage you can borrow.

How much mortgage can I borrow?

Analyze your financial situation by calculating how much your total monthly earning is (from all sources) and how much you spend each month. It should include all forms of expenses including debt payments.

  • Differentiate between expenses which are necessary and expenses which are optional.
  • Calculate the added expenses that will occur once you own a house. For example: maintenance charges, property taxes and fuel cost if your new house is far away from your workplace. Further, you should consider your future plans: whether in a few years your expenses will increase. For example: cost of college education for your kid.
  • Check how much you can cut down on your spending. Try to control all unnecessary expenses. Finally, check how much of money you’ll be left with after meeting all your expenses (each month). Based on that, you can understand how much mortgage can you afford.

Thus, by clearly understanding your financial situation, you can figure out the answer to this question – “mortgage how much can I borrow?”.

Lender’s criteria for determining how much mortgage can you borrow

While determining how much mortgage you can borrow, lenders consider the following factors:

  1. Front-end Ratio. It is the part of annual income which is used to pay mortgage every month. A mortgage payment is comprised of four parts : principal, interest, taxes and insurance. It is known as PITI. Lenders prefer a PITI that does not exceed beyond 28 percent of your annual income.
  2. Back-end Ratio. It is the part of the annual income which is used to make payments for debts. This is also called debt-to-income ratio. Apart from mortgage, this involves other types of debts such as credit card debts and personal loan debts. Lenders prefer a back-end ratio that does not rise above 36 percent of your annual income.
  3. Down payment. Lenders consider 20 percent of the price of a house as a decent down payment. If you manage to pay that amount, you can be spared from insurance requirements.

When you buy a house, it is very important to make proper payments on your mortgage or else you may even loose the house in a foreclosure. Keep in mind the factors described in this article to find out – “mortgage how much can I borrow”? Further, you can take the help of a mortgage calculator in order to get a better idea of your mortgage affordability.

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