How to Tell How Much You Can Borrow

Written by Posted On Wednesday, 14 February 2024 00:00

How much can you afford to borrow when getting ready to buy a home? That depends upon several factors, some more important than others. Affordability is generally determined by your monthly payment. Your monthly payment is affected by current market rates and the size of your home loan. In addition, the length of your loan will also affect the monthly payment. Shorter term loans for example may have a slightly lower rate but because the loan is squished into a 10 year term compared to the more common 30 year loan, the payment will be higher.

So let’s start. Generally speaking, the mortgage payment should be around one-third of your gross monthly income. When lenders evaluate affordability, they look at not just the mortgage payment but also an amount for monthly property taxes and insurance. That’s the number they use, not just your principal and interest payment. If the gross monthly income of all borrowers on the note amount to $9,000, then lenders like to see your total payment around $3,000.

But what about all your other bills, are they factored into that one-third amount? No. Other payments that would appear on a credit report are included. This includes both installment and revolving debt. Installment debts are those such as an auto loan that has fixed payments every month. Over time, the car is eventually paid off. The car payment is figured into this amouint, but only if there are more than 10 payments remaining. Revolving debt is like your credit card. The balance can change every month and so will the payments. Everyday bills such as utilities, food, etc won’t count. For this payment lenders like to see these bills be around 40-43% of gross monthly income.

However, how much you can borrow can also depend upon your credit scores. Borrowers with high credit scores might be able to borrow more than someone with less than stellar credit. Your loan officer will help you out with these numbers if you need some assistance early on.

Finally, how much you can borrow also depends upon how comfortable you are with the new monthly payments. It might surprise some to find out they can qualify for compared to what they’re paying now in rent. If you're told you can borrow up to a certain amount but you’re not comfortable with that amount and would like to borrow less, by all mean, pay what you feel comfortable with, not necessarily how much your lender said you can borrow.

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David Reed

David Reed (Austin, TX) is the author of Mortgages 101, Mortgage Confidential, Your Successful Career as a Mortgage Broker , The Real Estate Investor's Guide to Financing, Your Guide to VA Loans and Decoding the New Mortgage Market. As a Senior Loan Officer and Mortgage Executive he closed more than 2,000 mortgage loans over the course of more than 20 years in commercial and residential mortgage lending. 

He has appeared on CNN, CNBC, Fox Business, Fox and Friends and the Today In New York show. His advice has appeared in the New York Times, Parade Magazine, Washington Post and Kiplinger's as well as in newspapers and magazines throughout the country. 

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