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How do the Lenders Determine How Much They Will Lend?
Lenders look at your ability to pay both types of costs (the amount of money you’ll need for the initial purchase and the ongoing costs of paying back your mortgage) when they assess your ability to buy, and from that, they determine how much money they will lend you. You can predetermine this amount before you ever visit a lender using the same formulas they do.
Several factors are used in judging your ability to handle a mortgage, including income, employment record and credit worthiness. One way you can estimate the price range you can afford is to look at the amount of money you have available for a down payment.
A “conventional mortgage” is the most common mortgage. Lenders will loan up to 75 per cent of the “appraised” value (estimated market value) of the property or the purchase price – whichever is lower in this type of arrangement. The remaining 25 per cent is the amount you will contribute as your down payment.If you want to buy a home that has an appraised value of $200,000, a lender may loan you 75 per cent or $150,000 on a conventional mortgage when you contribute a down payment of $50,000.
If you plan to borrow funds through a conventional mortgage, this is how you can calculate your target:
Multiply the money you have available for a down payment by four. For example, if you have access to $40,000, you may be able to purchase a home with an appraised value of $160,000($40,000 x 4 = $160,000).
Reputable lenders will “qualify” borrowers before offering mortgages to ensure that they do not take on a debt load that is impossible to carry. Ideally, they suggest that your monthly housing expenses (mortgage payment and taxes), plus condo maintenance fee, if that is applicable to you, should not exceed 30% of your gross family income. This is your Gross Debt Service, or GDS.
In some cases, lenders may use another calculation called the Total Debt Service (TDS) ratio, which allows for no more than 40% of your gross family income to be used when calculating the amount you can afford to pay for your housing expenses. This 40% calculation may vary slightly among lenders.
By knowing exactly what you can afford, you can make your home purchase with confidence.
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