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Home affordable: Factors to help lenders decide your affordability

Now, that you’ve finally decided to move out of a rented accommodation and own a house of your own, then before you delve any deeper into home buying, it is important for you to find out your home affordability. In other words, you must have a clear understanding as to ‘how much of a housing cost can you afford comfortably?

There are several factors based on which lenders will determine whether or not you can afford a home of your choice at the given moment, the moment you’ve approached them for mortgage help.

Lenders will evaluate your credit
Amongst various other key factors that would help you to secure a mortgage loan, your credit is one of them. Generally, your credit score is derived on the basis of your credit history, total amount of debt you owe, kinds of credit you use, length of your credit history and the number of inquiries that you’ve for fresh credit.

In case, your credit score lies within an unfavorable range or your credit report has scathing marks, then it is the traditional lenders who’ll particularly be skeptic to approve you for a mortgage loan. Even if you chance upon a loan, then it is very likely that it’ll come at an exorbitant rate, thereby resulting in a relatively higher monthly mortgage payment.

So, before applying for a mortgage, make sure to pull your credit report for review and find out in details about the desired lending norms of the concerned lender that you must meet in order to qualify for an affordable one.

Staying well-versed with your own credit profile and the mortgage lender’s expectations, will help you to understand the rate of interest that you are very likely pay on the new loan and, at what terms and conditions.

Your debt-to-income ratio
Your debt-to-income ratio or DTI is one of the foremost factors that are used by the lenders to decide the amount of housing cost you can afford with ease. This is mainly used to ensure that you can bear your monthly mortgage payments along with the other debt payments like credit cards payments, student loan payments and auto loan payments without further straining your finances.

A general rule of thumb says that your DTI including your upcoming mortgage payment should never be more than 36 percent of your present income. This is calculated by considering your gross monthly income and that of your overall debt liabilities, where the total debt owed by you is divided by your monthly income.

For example, you make $10,000 a month and carry a monthly debt of $1000, then as per the said formula your DTI would be 20 percent. So, a conventional mortgage lender would approve you a loan where your monthly mortgage payment shall be $2,600. This includes additional housing costs like homeowners insurance, property taxes and private mortgage insurance (PMI).

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