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What size house can you afford? – Consider Debt vs. Income
When Determining how much house a potential buyer can afford, mortgage brokers consider your debt vs. income ratio. This ratio is composed of your gross income divided by the amount you pay monthly for debts.
For example if your ratio is something like, 25/45. Twenty-five percent of your monthly income is used to pay for housing. 45% of your monthly income contributes to paying down debt every month.
This ratio alone does not determine your top loan amount however. Other factors include down payment size and credit history. As a general rule of thumb, FHA loans require a 29/41 ratio or better.
Whether you are trying to buy a house, a new car or simply make some repairs to your home, there is a loan that suits your needs. Finding that loan can help you complete your goals and with interest rates at an all time low, now may be the time for you begin the search. Fill out our free short form and contact up to four lenders about you loans choice.
For each one of these reasons there is a loan that fits your credit, income
and purpose. For example:
- If you are purchasing a new car a home equity loan may be your best option.
A home equity loan generally has a low interest rate because it is secured
by your home, and when you borrow against your equity there is less risk because
your equity is something that you already own; it is the part of your house
that you own and is not covered by the mortgage. For example, if your home
is worth $180,000 and your mortgage is $100,000, you have $80,000 in equity.
Many lenders will allow you to borrow anywhere from 85 to 100% of this amount,
allowing the funds to purchase a luxury car without having to pay steep interest
or monthly payments.
- If you are interested in making a serious of home improvements a home equity
line of credit may be best for you. A home equity line of credit gives you
what is essentially a credit card account with an amount based on your equity.
Over a draw period of five to ten years, you may take as much or as little
as you need to cover improvements. This loan is good in this situation because
it requires you to only pay interest on the money that you have drawn and
not the total amount available, so if you take the bulk of the money in the
last year, you will not have to pay interest on the bulk until that point.
Also, if the estimates for your home improvement were off, as they sometimes
are, you can take more or less depending on the situation.
- If you are buying a home a fixed rate mortgage would be best for you as
you would need a large amount in advance to purchase the home. A fixed rate
would give you the security of knowing what the monthly payment of your loan
will be for the life of the loan.