How Much Mortgage Loan Can I Afford?
The amount of mortgage loan you can afford is based on a comparison of your usable income and assets to your potential debt and expenses with the new mortgage loan.
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Basics
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Mortgage loans are provided by lenders in exchange for a lien against the property. Your mortgage payment is usually your highest monthly expense and you want to be sure you can meet your mortgage obligations along with other expenses.
Ratios
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Lenders use two common ratios to determine your loan affordability. Debt-to-income calculates your total debt as a percent of income. The standard maximum is 36 percent. Mortgage-to-income has a 28 percent maximum and is your potential mortgage payment as a percentage of income.
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Considerations
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Lender ratios of debt serve as a guideline in determining your loan affordability. Some lenders will not lend you more than these ratios indicate without a higher than normal--more than 20 percent--down payment and excellent credit rating. You must also consider unusual monthly expenses, including charitable contributions, alimony, child support, which are not always considered in this standard ratio measurements. Overextending yourself could put your home at risk should you face foreclosure.
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References
Resources
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