The main concern for mortgage lenders is your ability to repay the mortgage loan. They will look at your monthly income, your credit history, and how much cash you have for a down payment. Your borrowing power increases substantially if you can offer a large down payment, and you have no debt and good credit.
The following factors contribute to how much you will be approved to borrow.
Down payment ― The larger your down payment is, the bigger the loan can be (20% down is ideal). Putting more money down can also get you better interest rates and a more expensive house, but there are many options for to those who need/want to put less down.
Credit score ― The higher your credit score is, the lower the interest rates will be. A credit score of 740 or more will get you best mortgage rates, but if you fall short there are still ways to get a loan (e.g., government-backed programs). If your credit score is weak, you may be able to make up for it with a large down payment. Minor credit problems should not completely limit your choices ― it may be a good idea to explain your situation to the lender.
To ensure that your credit score is as strong as possible, you should review your credit report for accuracy and completeness. The three major credit reporting bureaus (Experian, Equifax and TransUnion) maintain a centralized website where people can request a free annual credit report.
Monthly income & debt ― As explained in the “Debt-to-Income Ratios” section above, lenders generally limit monthly housing costs (mortgage payments, insurance and taxes) to 28% of your monthly gross income. They also restrict your total monthly debt obligations (including housing costs) to 36% of your monthly gross income. Quite simply, the more income you earn and the less debt you owe, the bigger the loan you can get.
Mortgage term length ― Longer mortgage terms may allow you to borrow more money and make lower monthly payments, but you will wind up paying more interest in the end. Shorter mortgage terms will cost you less in overall interest, but the monthly payments will be higher and you may have to settle for a smaller loan.
Taxes and insurance ― The less you have to pay in property taxes and insurance, the more money you have available to pay for the loan and therefore, the bigger your loan can be. If you put at least 20% down, you can avoid paying for mortgage insurance altogether. If you do your research, you’ll also avoid overspending on homeowners insurance.
Use a Mortgage Calculator to Find out How Much You Can Borrow
The “How Much House Can I Afford?” Mortgage Calculator will help you determine the mortgage amount you may qualify for, as well as the maximum home price you can afford. There are 3 parts to this mortgage calculator: Income and Debt Obligations, New Loan Assumptions, and the Results.
To use the mortgage calculator, begin by entering your information on the “Income and Debt Obligations” page. This includes all your monthly debt obligations (back-end ratio) such as credit card payments, car payments, child support, etc. Click “Next.”
The second part of the mortgage calculator is called “New Loan Assumptions.” This is where you provide information about the loan ― including the interest rate, length, down payment amount, property taxes, and homeowners insurance. Click “Calculate.”
The last part of this mortgage calculator is the “Results” page. It displays your front-end ratio and back-end ratio, as well as your maximum allowable payment and the home value you can afford.
Keep in mind that the “How Much House Can I Afford?” mortgage calculator estimates the loan amount you may be able to obtain ― a lender may come up with slightly different numbers.
It is recommended that you arrange your financing before you actually start looking for a house. Most lenders will pre-qualify or pre-approve you for a certain amount. This will give you a more accurate idea of how much house you can afford. It also makes you a more attractive buyer and gives you some negotiating power – nobody wants a deal ruined because of a financing problem.
[Go to CALCULATOR: MONTHLY MORTGAGE PAYMENTS]