How Much Can I Borrow for a Home?
How much you can borrow to buy a home is a factor of how big of a monthly payment you can afford. Your monthly payment is made up of the amount you are borrowing and the interest the lender charges you.
So I get to decide how much I can borrow?
You are responsible for knowing how much you can afford. But the lender decides how much it is willing to lend you based on information on your application, like your income, your debts, your credit score and how much cash you have for a down payment.
How does the lender use that information?
- The lender uses your income and debt information to calculate a debt-to-income ratio. Most lenders require that your mortgage payment plus other recurring debt not exceed 36% of your gross income. For more information see our article explaining the debt-to-income ratio.
- Your credit score indicates to the lender how likely you are to repay the loan. Your credit score is one of the major factors lenders use to determine your interest rate: generally, the higher your score, the lower your interest rate.
- Your down payment also has a large impact on your interest rate. Many lenders charge a higher interest rate if your down payment is less than 20 percent of the property’s value.
Based on what you’ve said, I can borrow more than I thought!
Before you celebrate, review your budget carefully. Remember that the debt-to-income ratio only calculates recurring debt, like car payments and minimum credit card payments, but doesn’t include other household expenses like utilities, tuition, home and car maintenance and discretionary spending. Also, the ratio is based on gross income, not your actual after-taxes take-home pay.
So where should I start?
Document your budget to determine how much of after-taxes income you are spending a month on non-housing expenses (including savings). How much is left over for a house payment? If it seems small – are there other areas of your budget where you could cut back? When working out your budget, also remember that there are other costs associated with home ownership: taxes and insurance, yard and home maintenance.
The GetSmart What Price Home Can I Afford calculator can help you get an idea of what you can afford.
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