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Figure Out How Much House You Can Afford
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There are a set of mathematical formulas (referred to as "qualifying ratios") that lenders use to
determine what a buyer can afford to pay monthly and subsequently limit the loan amount to the lesser
of the two ratios. Most commonly, lenders use two percentages referred to as the 28/36 rule. The 28%
value is the the percentage of the buyer's gross household income the lender would consider avaialable
for monthly mortgage payments. The 36% value utilizes the gross household income, but also considers
all other debt payments (e.g. auto and credit card payments) as well. So, as an example:
Buyer's gross monthly income = $5,000
28% of $5,000 = $1,400 (affordable monthly mortgage payment)
Buyer's monthly debt payments = $1,100
Buyer's gross monthly income = $5,000
Buyer's adjusted monthly income = $3,900
36% of $3,900 = $1,404 (affordable monthly mortgage payment)
In this example, both ratios show the buyer is qualified to make payments of approximately $1,400
per month. To show the impact of excess debt on how large a loan a buyer would qualify for, assume
the buyer's debt in the above example is $2,200 instead of $1,100. 36% of an adjusted monthly income
of $2,800 would qualify the buyer to make monthly mortgage payments of $1,008.
In order to purchase a more expensive home, and qualify for a larger mortgage payment, pay off or
reduce (as much as possible), all debt, and if feasible, increase the amount for a down
payment.
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| Copyright 2005. Nancy Clark. All Rights Reserved. |
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