couple taking a look at a new house

What Determines the Mortgage You Can Afford?

Homes for sale have plummeted at their lowest level in 17 years, according to a Reuters report. That’s on a national scale. On a local scale, areas like Ogden are seeing fewer houses on sale. Real estate agents claim it is the tightest market they have ever seen in recent history.

But city officials are working on a remedy: demolish vacant buildings to make way for residential development. This may help improve housing supply, which means it wouldn’t hurt to prepare as a buyer as early as now. Before you work on your application for a home loan in Ogden, though, ask yourself this critical question: how much home can you comfortably afford to borrow?

Your lifestyle, income, and expenses are the basic elements you will consider when answering this question. The following are the elements a lender will base their answer on when evaluating your mortgage application.

Back-End Ratio

This is sometimes called your debt-to-income ratio. It indicates your gross income’s percentage vis-à-vis your debts. The debts included in the calculation are your credit card payments, student loans, child support, and other personal loans.

Most lenders will favor lenders with a back-end ratio of less than 36 percent. The less your ratio, the higher the mortgage you will qualify for. The mortgage amount your lender will approve will reflect how much you can comfortably repay monthly.

Front-End Ratio

This is a percentage of your annual income, which you can commit toward the monthly repayment of your home loan. The repayments, in this case, include insurance, taxes, principal, and interest. The rule of thumb for home buyers is to keep their front-end ratio below 28 percent, though some lenders can let you exceed 40 percent but advance unfavorable terms.

Down Payment

couple talking to real estate agentThis denotes how much you will pay upfront for the purchase of your property. Most lenders will ask for down payments of at least 20 percent of the property’s purchase price, and this is also the minimum percentage if you want to avoid payment of private mortgage insurance, or PMI.

It is prudent to save as high an amount in down payment as you can since this will boost your chances of loan approval and give you favorable loan terms. Moreover, this guarantees you will comfortably afford even a seemingly high-cost property.

Credit Rating

This will determine a lender’s level of risk in advancing you a loan. Lenders use different methods to calculate their risk level, but they all primarily depend on your credit score. A low score generally means a high-interest rate and mortgage insurance since you are a high-risk borrower. Even if you do not need a mortgage today, start working on your score to guarantee you get favorable terms.

Getting a mortgage will be your life’s best decision when handled well. Many a home ownership dream have been marred by mortgages the borrower could ill afford. The above elements will enable the lender to assess how much you can afford, but some will still advance you an amount above it. This will, unfortunately, overstretch your finances and make the mortgage’s repayment an uphill task. The sad eventuality in this instance is often foreclosure.

As the real estate industry waits for Ogden sellers to put their houses on market, work on your home loan application. What you do today could help you get that home you envision.

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