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How lenders decide how much you can afford to borrow?
Mortgage lenders are required to assess your ability to repay the amount you want to borrow. A lot of factors go into that assessment, and the main one is debt-to-income ratio.
Your debt-to-income ratio is the percentage of pretax income that goes toward monthly debt payments, including the mortgage, car payments, student loans, minimum credit card payments and child support. Lenders look most favorably on debt-to-income ratios of 36% or less — or a maximum of $1,800 a month on an income of $5,000 a month before taxes.
Typical costs included in a mortgage payment
If your mortgage payment included just principal and interest, you could use a bare-bones mortgage calculator. But most mortgage payments include other charges as well. Here are the key components of the monthly mortgage payment:
This is the amount you borrow. Each mortgage payment reduces the principal you owe.
What the lender charges you to lend you the money. Interest rates are expressed as an annual percentage.
The annual tax assessed by a government authority on your home and land. You pay about one-twelfth of your annual tax bill with each mortgage payment, and the servicer saves them in an escrow account. When the taxes are due, the loan servicer pays them.
Your policy covers damage and financial losses from fire, storms, theft, a tree falling on your house and other bad things. As with property taxes, you pay roughly one-twelfth of your annual premium each month, and the servicer pays the bill when it’s due.
If your down payment is less than 20% of the home’s purchase price, you’ll likely pay mortgage insurance. It protects the lender’s interest in case a borrower defaults on a mortgage. Once the equity in your property increases to 20%, the mortgage insurance is canceled, unless you have an FHA loan backed by the Federal Housing Administration.
Typically, when you belong to a homeowners association, the dues are billed directly, and it’s not added to the monthly mortgage payment.
*Up to $700. °Must be at least 6 months after initial refinance or purchase with Shout Mortgage LLC. Re-finance must be through Shout Mortgage LLC. Loan must first close with Shout Mortgage LLC to receive appraisal reimbursement.