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How Much Mortgage Can I Borrow - Factors in Determining a Mortgage Amount

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For many people, part of the American dream is owning their own home. However, in the recent mortgage crisis in the United States, this dream came crashing down for many. Therefore, while home ownership is certainly a worthy goal for many people, before looking for a mortgage, you need to be sure to ask the question, How much mortgage can I borrow?

Four key issues determine the amount of money that you can borrow for a home loan. First, your income will obviously be the starting point. Typically, you should plan on spending no more than about 28% of your gross income on your monthly payment amount. To figure this amount, multiply your annual salary by .28, then divide that figure by 12. Therefore, if you make $40,000 per year, then no more than $1,000 should go to your monthly mortgage payment. Quite often, property taxes and insurance are rolled into a monthly payment. The total of the mortgage payment, property tax payment, and other fees should all be considered part of your monthly payment. So with a 30 year fixed interest rate mortgage, this amount to a loan of about $150,000, depending on what your property tax rate and other fees you will need to factor into your monthly payment.

In addition to your monthly income, lenders will also consider the amount of debt that you are currently carrying. This includes credit card debt, family services payments, auto loans, student loans, and other monthly payments. Often, if your total payments (including your mortgage) amount to more than 36% of your gross income, you will have a hard time obtaining a traditional mortgage, and if you can, the total that you can borrow might be reduced. Other factors, like your credit rating will also have a significant effect on the amount that you can borrow. If you have a higher credit score, then you will have a better chance of getting a few extra thousand dollars on your mortgage to move into that larger house. Also, different lenders will often have different standards for loans. Also, it is harder to get a loan now than it was in 2006 or 2007 because the government has applied additional pressure on lenders to avoid default mortgages. Before applying for a mortgage, make sure that all of your credit payments are on time for about six months and that you have no outstanding payments due.

Finally, you need to consider your own budget and lifestyle. Consider how much you are spending per month on your rent. If this is lower than 28% of your income, then you may need to consider getting a loan that is less than what a lender might offer you, especially if you are not saving the extra money that could go toward a mortgage payment. Just because you can get a loan does not mean that you should get it. On the other hand, if your monthly rent is higher than 28% of your income, then it might be a better idea for you to take the full loan amount, because this might end up saving you money in the long term.

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