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How Much Loan Can You Afford?

Are you considering purchasing a home or doing mortgage refinancing?  If so, the first important item to consider is how much of a loan you can afford.  This will vary depending on the interest rate because a lower interest rate will give you a lower monthly mortgage payment even on the same loan amount.   

You cannot predict the future, so taking out a loan for a mortgage refinance or a home purchase is really always a risk.  It is however, usually worth that risk to fulfill the American dream – owning your own home.  You never know if you may lose your job in the future or become ill or disabled and not be able to work.  There are various circumstances that could come about that would affect your future ability to afford the loan you can afford today.  But, we can’t live with “what ifs.”  We have to live life for today and move ahead.  There are numerous lenders for mortgage loans who offer varying types or loans and programs to fit different people’s circumstances and situations.  It is important to note that different loan products have different requirements as to credit score, credit history, and employment that all affect the amount of loan the lender thinks you can afford. 

The mortgage industry is ever changing and evolving.  One example of this is in the past, few if any lenders would approve a home loan to an individual with a debt to income level above 30%.  Now, you will find that many loans are being approved for people with a 50% debt to income ratio, and some individuals with a higher ratio are still getting home loans.   

However, there are some things you can do to help determine the maximum amount for a home loan that you can afford.  Remember, it is a good idea to stay away from those upper limits if at all possible so that you don't stretch your budget too thin and you have extra money when crises may hit.  The first thing you need to do is to create a budget.  This should include everything you spend money on each month such as groceries, utility bills, car payments, medical bills, etc.  The next thing to do is to determine your monthly income from all sources.  When you subtract your expenses from your income, you can see how much room you have in your current budget.  If the two numbers are very close, then you don't have much room to budge and you would be wise to make sure you choose a house payment that is the same or less than your current loan or rent payment.  If this is the case, you may be better off to opt for a mortgage refinance rather than a home purchase. 

You should also look at the type of loan you can qualify for.  Even if you are simply thinking of mortgage refinancing, if you would have to get a bad credit mortgage in order to refinance, it is probably not a good idea for you unless you can really lower your payment significantly.  Remember that although the lender may say you qualify for a 50% debt to income ratio, you want to stay closer to 30 or 35% in order to be sure you don't end up in a financial struggle.  The lower your payments, the less stress you have to try to keep up with it.