The desire to be a homeowner is the main reason why people get mortgage preapproval and take mortgage loans across the world. It is important to consider mortgages only for very valuable decisions such as home buying. If you want to finance other expenditures, you can opt for an online loan, or other options but not a mortgage. In taking a mortgage loan, a property is often taken as collateral and the borrower in return receives cash up front. The borrower is expected to make payments for an agreed period of time until the loan is repaid in full. Am mortgage is often referred to a home loan when it is used to acquire a home. Usually, the borrowers do not have enough cash to buy a home and that is why they opt for this arrangement.
The same house can also be used as collateral to borrow other types of loans where necessary. There are different types of mortgages and it is up to borrowers to determine the ones that clearly fits their situation. In most cases, the loan types are determined by their repayment periods. For instance, the loan duration in most cases can range between 5 and 30 years, though some lenders will agree to lend on a 50-year term. Besides, the interest rate is also a significant factor that determines the type of mortgage. Depending on the agreement, the rate may be fixed or variable. When the agreement is on a fixed rate, it means the interest charged will remain the same throughout the loan period. On the other hand, if it is variable, it will keep changing depending on the factors agreed upon. Another significant factor is the total payment for each period.
The demand for mortgages will keep on varying depending on the market situation. The interest rate on mortgages is always volatile, it can be high or low. When the interest rate drops after an agreement has been signed, there is always an option for borrowers to refinance.
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How much you can borrow
Why are mortgages important? For a simple reason: they allow you to purchase a house even when you do not have enough cash. It is always a risk to the lenders since it is always not a guarantee that borrowers will obey their obligations ion future. On the other hand, it is a risk to the borrower because failure to repay will lead to loss of the property. Sometimes it is so hard to secure mortgages. Nevertheless, job status along with credit score often dictate rates and terms.
The much you can borrow depends on a number of factors. For years now, mortgage institutions focus more on the borrowers’ levels of income, in what is referred to as the loan-to-income ratio. Nowadays, lenders cap this ratio at four-and-a-half the value of your income. They also determine the number of monthly payments borrowers can afford after considering after assessing several personal and living costs. This is, generally, referred to as affordability assessment.
From the year 2014, another variable was brought into the equation, the stress test. In this case, they take into account how you are likely to be affected with by an increase in interest rate as well as possible changes to your lifestyle, for instance, getting a baby, redundancy and having a career break. If they get a feeling that you may not afford your mortgage in these conditions, they restrict the much you can borrow. By way of review, what determines the amount you can borrow? So far we have discussed the following three factors:
• Loan to income ratio
• Affordability assessment
• Stress test
Knowing how much you are able to borrow is very important. In fact, you should consider this before even fantasizing that dream home. Of the three aforementioned factors, only loan to income ration can be determined with certainty. Others are unpredictable. However, there are other subsets of these three factors that can help us understand clearly how much you can borrow. These include:
• The amount of the loan you intend to borrow against the property value. This also referred to as loan-to-value
• Credit score
• Income
• Outgoings.
But again, the question is: how much can you borrow? For you to decide check out best money lender in Singapore to compare loans online. On the lenders perspective it should be: how much can you afford? Let us briefly discuss each of the factors.
• The effect of loan-to-value on the much you can have.
The LTV ratio shows the amount of the mortgage against the value of the asset. For instance, suppose you afford a down payment of $ 100,000 for a $300,000 property, your mortgage will be $200,000, or 200,000/300,000. This means you will be able to borrow probably 67% of the property value. This ratio is often used to establish risk exposure to lenders when valuing a mortgage. When there is a higher loan-to-value ratio, the lenders will feel there are higher chances of the borrower defaulting because it is very little or even zero equity built up in the asset. This means it will be difficult for the lender to sell the property at a value that covers the remaining balance and still profit.
• Credit score.
Borrowers credit score plays a significant role in determining the amount of mortgage received. A low credit score means your creditworthiness is questionable and you are likely to default the mortgage. In this case, the lender may utilize a lower multiple of what you earn to determine the amount of mortgage you can possibly borrow.
• Income.
Conventionally, lenders applied a multiple of borrowers’ income to determine they can borrow. For instance, if you earn $40,000 per year, you will qualify for a mortgage of this value times four, that is around $160,000. However, lenders offer different multiples and therefore doing research on this is important. But since a number of homes have double incomes, a choice is offered. Firstly, the second income may be included in the calculation. For example, if the second income is $20,000, the sum of the two will be multiplied by four, in this case, the mortgage will be $240,000. Alternatively, the sum of the two incomes may be multiplied by a lower multiple, perhaps three. In this case, the mortgage will be $180,000. However, this approach is only used to determine the overall maximum but still, affordability assessment may be carried out to determine the amount they can lend.
• Outgoings.
Lenders use your regular expenses, other loans, and insurance to determine the mortgage you can qualify for. The most common outgoings include:
a) Loan repayments, including credit cards
b) Taxes
c) Basic utilities such water and electricity
d) Insurances
Lenders may also want you to ascertain that you can afford to make repayments in case the interest rates increase. In this case, you will need suitable means or cut some of your expenses.
Conclusion
In light of the above, income is the main factor that determines the amount of mortgage you can borrow. Nonetheless, it is very broad and impacts other key factors that borrowers often consider, such as your outgoings and the loan-to-value ratio.
