Mortgage Loan 101 - How Much Mortgage Loan Debt is Right For You?


For generations investing in real estate, whether a home or commercial property has been a fairly safe investment. Most properties have held and even enjoyed small increases in value from one year to the next. An investment in real estate sometimes offered big financial returns, sometime small but usually always "safe" returns compared to other investments.

After the financial crisis of 2008, the world of real estate and mortgage lending has changed for the near future. Some property values have decreased up to double digits. Increased unemployment has spurred record numbers of foreclosures.

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There are still many people looking to buy new homes though. Whether downsizing, upgrading, relocating for jobs or just hoping to take advantage of lower interest rates, there are many people wondering, "What kind of mortgage loan debt would I qualify for?"

Some potential homebuyers have their sights set on a home before they've been through a loan qualification process and this can sometimes lead to less than ideal financial decisions.

It's fun to ride around and look, research and dream but it is important to take a look at what kind of mortgage you can pre-qualify for and even then to determine is that's really a number that you can live with comfortably.

How Lenders Determine Mortgage Loan Affordability:

Well there is the standard that has been used by most lenders for years which is called the 28/36 rule. This is still a very helpful tool as long as applicants keep in mind that under this new real estate and banking culture, things have changed a bit. Lenders may tweak these numbers a few points for added security. They may also ask to see a portfolio for collateral and many are requiring more money down. Of course all of this usually stands on an applicant having an average or above credit rating.

What is the 28/36 rule?

Mortgage payments as well as property taxes and insurance shouldn't total more than 28% of your gross pay. Yes, that's gross pay, as opposed to net pay. That's the first number.

Monthly outflow including mortgage payments, property taxes, insurance and installment debt such as credit cards, student loans, personal loans or car loans the cannot equal more that 36% of your gross pay. That's the second number.

Here's an example for a household with an income of $84,000.

If a household making $84,000 a year also had $500.00 worth of monthly installment payments, they could qualify for a mortgage of around $1,960.00 bases on the 28/36 rule.

Is the maximum mortgage loan best for you?

Most applicants are ecstatic to find that they qualify for the loan amount desired but before you sign on the dotted line, ask yourself a few important questions.

If I take on this mortgage loan will I still have money left over for...

-- Paying off other debts?

-- Saving for retirement?

-- Saving for college tuition?

-- Travel or vacations?

Remember, a higher mortgage payment also means:

-- Higher taxes

-- Higher monthly maintenance

-- High homeowner's insurance

It's important to understand how a mortgage debt loan number is estimated but even if you qualify, you may not want to take advantage of the maximum amount of debt that you qualify for. Leaving some room for emergencies as well as pleasures can help you enjoy any home more.


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