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Every home buyer is different. They have different financial situations. They have different home buying needs. They have different incomes and employment histories. All of these factors are to be considered when a mortgage lender reviews any borrower’s application. This is how they determine who is eligible for a home loan, which type of mortgage loan is best and what mortgage rate they qualify for based on these criteria.
How Much Can I Afford?
One of the most common questions we get is “How much can I borrow?” This is a good question to ask when buying a home, and it’s something you should figure out before you start searching for properties. You don’t want to go out and find the home of your dreams, only to realize later that you cannot afford it. You may not qualify for a mortgage loan of that amount, or the monthly payments are out of your reach.
Monthly mortgage payments are generally made of up of four primary components:
- Principal
- Interest
- Taxes
- Insurance
This is also known as “PITI.” There may be some other lending fees and escrow account contributions as part of your monthly mortgage payments. The principal is the actual loan amount. If you are buying a house for $400,000 and you apply 10% ($40,000) as your down payment, your loan principal will be $360,000 and that will be the basis for your monthly payments. All mortgage loans are amortized in such a way that earlier payments will include more interest than principal. Over the 30 years of the mortgage loan, you will gradually pay down the principal along with the interest, taxes, insurance and any other fees.
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How is My Mortgage Rate Determined?
Your fixed mortgage interest rate (aka “mortgage rate”) will be determined based on your qualifying criteria. Your mortgage lender will review your income, employment history, debts, down payment and credit rating (aka “FICO score”). These criteria will be researched to see if you qualify for a mortgage loan. The stronger your financial situation, the lower your mortgage rate will generally be. This is why it’s a good idea to work on getting your finances in order before you apply for a mortgage loan or start your home search.
Mortgage Payment Calculation
There are a few different rules of thumb out there to help people figure out how much house they can afford based on income. Some experts will say that you shouldn’t borrow more than 2-2.5 times your gross annual income, which is a very conservative approach. Others will use the 28-36 rule. It states that you shouldn’t spend more than 28% of your gross monthly income on total housing expenses and no more than 36% on total debt payments (including mortgage, car loans, credit cards, etc.).
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Again, every home buyer will have a different financial situation. Some have a high down payment, but a low credit score. Others have a great credit rating, but weak employment/income history. This is why your mortgage lender will review everything to determine your eligibility and set your qualified mortgage rate.
The Benefits of Mortgage Pre-Approval
The Moreira Team’s online mortgage calculator can help you get a basic idea of your home loan potential. However, it is ultimately a very good idea to get pre-approved for your mortgage loan before you start your home search. This is the best way to figure out how much house you can afford. A mortgage pre-approval essentially goes through all the standard loan application and financial review procedures. You’ll be able to calculate your mortgage rate and get fairly accurate monthly mortgage payment estimates.
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In many cases, home buyers qualify for a higher loan total than they might actually want to borrow. This is why it’s important to ask for monthly payment estimates as that is often your best barometer for affordability. Let’s say you qualify for a mortgage loan up to $450,000. However, the actual loan payments for that amount are well beyond what you can afford to pay each month. You may find yourself looking closer to the $350,000 range, where the payments are much more within your reach. Just because you qualify for a higher loan amount doesn’t mean you should borrow beyond your means.
A mortgage loan pre-approval will not only help you gauge how much you can borrow. It will give you more buying power. Home sellers will want to see a pre-approval letter as part of your purchase offer. It shows you have solid financial backing and present less risk of having problems during the closing process. A mortgage loan pre-approval can also help you lock in the lowest possible mortgage rate based on market timing.
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Your Atlanta Mortgage Experts
If you are planning to buy a home in the Atlanta area, contact Moreira Team | MortgageRight today to get started with your loan pre-approval. We can help you explore all your mortgage lending options, figure out how much you can afford to borrow, and lock in the best mortgage rate based on your qualification standards.