It's not about how much you can borrow but how much you can pay. It doesn't matter how much you think you can afford. Instead, it is about how much the mortgage lender believes you can afford. Although it is possible to believe that a loan is reasonable, this can be subjective. This can cause problems for lenders as they must assess the borrower's ability to pay a mortgage.
This is one way that mortgage lenders can avoid this problem. They can create their own system of affordability. This is not as hard as it sounds. Each mortgage lender has its own criteria. It is worth looking at the available options and deciding what would be best for you.
Let's suppose that a mortgage lender in Nashville tells you you can borrow three-times your annual salary. This excludes any other loans. You can reduce this by having a yearly income of between 20,000 to 300. The annual loan amount is 12x300, or 3,600. Add this to your annual income and you get 16,400. This multiplied by 3 gives you 49,000.
Don't worry about your income as every lender is unique. An estimate of three times your current income is a conservative one. Lenders can lend up to 4x, but some lenders will lend more depending on your financial situation and their criteria. Lenders may not take into account your current outgoings such as car loans and credit cards. This case is different from the one mentioned above. It's worth spending the time to find the right lender. Shop around.
A different set of criteria can also help mortgage lenders determine how much money they will lend to you. They determine how much of your income will be used to borrow. Let's suppose they decide to borrow 40% of your annual income. That works out to 8,000 for a person with 20,000 income. They then subtract any other loans such as a $300-per-month auto loan or $3,600 per annul. Then they calculate how much you can afford to pay each month, and arrive at a figure of 4,400 annually.
Although no one knows exactly what someone's financial situation is, these calculations can be used to help ensure responsible lending. All lenders must show regulators that they didn't lend money irresponsibly.
These regulations may also be of benefit to you. You should have a mortgage you can afford to repay. It is possible that interest rates change, the economy changes, or your mortgage repayments may change. Your mortgage payment must be affordable right now. How will you pay it off the future if you can't afford your mortgage now?
Before you apply for a loan, it is important to evaluate your financial situation. You should also ensure that the mortgage you're arranging is feasible after any rate rises. Ask your mortgage advisor if they have not. They will be able to offer you the same mortgage, but with a 3 percentage rate increase. You can move forward once you're satisfied it is affordable. Mortgage Route provides advice and assistance from mortgage brokers who are fully trained.
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