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Knowing How Much Loan Can You Afford


When you are looking at homes to purchase, one of the first things you need to do is to determine how much loan you can afford.  Of course, even the best plans don't always work out and a future job loss from a layoff or a serious medical issue may impact your ability to continue to afford the loan.  There are many different lenders who have different programs to work with people in all different circumstances.  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. 


For instance, in the past, few if any lenders would approve a home loan to an individual with a debt to income level above 30%.  Nowadays, 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.  As this example shows, there are many factors that affect how much loan anyone can afford. 


However, there are some things you can do to help determine the upper limits 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.  The first thing you need to do is to create a budget.  This should include everything you spend money on each month, such as your utility bills, car payments, groceries, etc.  The next thing to do is to determine your monthly income from all sources.  When you subtract the income from the expenses, you can see how much leeway you have in your current budget.  If the two numbers are very close, then you don't have much room to budge and your loan payment would need to be the same as your current loan or rent payment.  If this is the case, you may want 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 worth it 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 foreclosure later.