The amount of loan for which you qualify is based
on two different calculations. Using what are known as qualification
ratios, lenders evaluate your income and long-term debts to determine
a "safe" amount for your mortgage payments. A fairly standard
ratio is 28/33. Certain mortgage plans sometimes use more liberal
ratios - for example, the FHA currently uses 29/41.
Here's how it works: With a 28/33 ratio, you'd be
allowed to spend up to 28% of your gross monthly income for mortgage
payments. The lender will then run a different calculation. This
one is your loan payment and debt payments combined, which may not
exceed 33% of your gross monthly income. To calculate exactly how
much you may borrow, you also need an estimate of current interest
For Example: Suppose you had $1,000 a month for
mortgage payment; at 7% that would let you borrow about $160,000
on a 30-year loan. At 6% the loan amount would be nearly $175,000.
If your rate were 8%, the loan amount would be a bit less than $150,000.
As part of this calculation, you also need to estimate
and include the property taxes, homeowner’s insurance, and
Homeowner Association fees (if applicable) you might need to pay,
which are considered part of your monthly expense.
Begin the home buying process by using our mortgage
calculator to determine how much you can afford.
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