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If you’re planning for a mortgage, then it is very important to know as to how much you can really afford so that it does not leave you in trouble in future. The following factors play crucial role in deciding your mortgage capacity or in better terms, these points are essentially taken into consideration by lenders before you are granted a mortgage.

  • Your Monthly Income (after deducting taxes);
  • Existing debts if any; and
  • Amount you have saved for down payment.

Monthly Income: - Lenders generally advice that housing expenses should not exceed 25 percent to 28 percent of the homeowner's gross monthly income. The housing expenses include monthly mortgage principal, interest payments, property taxes and homeowner’s insurance. If you have no idea of what your property taxes or homeowners insurance will be, the following median statistical meanings can be used. According to a data by the American Housing Survey the median annual taxes per $1,000 value averages $12. The median property insurance costs $30 per month.

However, along with your steady income, the following could also be counted as a source of income

  • overtime bonus and commissions (average for one - two years);
  • net income from self employment;
  • social security, veteran's benefits and retirement;
  • interest and dividend income; rental income after deducting expenses and debt payments;
  • Income from trusts, partnerships, professional corporations, and so on.

Existing Debts: - These include all the liabilities paid by the homeowner other than the regular expenses. They could be child alimony, education loan, revolving debt in the form of credit card payment, homeowners housing expenses, etc. Notwithstanding, the existing debts should not exceed 35 - 40% of gross monthly income. In case of Federal Housing Administration (FHA) loans, the figure should not to exceed 41 percent of the homebuyer's gross monthly income. Lenders usually define long-term debt as monthly expenses extending more than 10 months into the future.

Down payment: - Homebuyers are deemed to posses an amount which is enough to pay as down payment to lender. Generally, the amount goes up to 20 percent of the asking price for the house and to pay closing costs (3 percent to 6 percent of the loan amount). Sources for a down payment could be savings, stocks and bonds, mutual funds, employee savings plans, individual retirement accounts, etc. Similarly, some mortgage programs allow you to use gift of money from parents or relatives that need not be repaid or grants from a nonprofit housing assistance organizations for a part of your down payment.

Thus, keeping the above factors in mind a homeowner can really test his or her financial standing and affordability before approaching any financial institutions or broker for home loan.

Sabina Anjum