Many people frame their dream of buying a house in terms of their monthly income.However, how much you can get for your mortgage is dependent on many other important factors in addition to your income. These include your expenses, budget, debt, and lender’s other limitations. This article is all about “How much can I borrow for my mortgage based on my income?”.
One monthly common rule says that your monthly mortgage and related housing expenses should not exceed 28% of your gross monthly income. With that, you can borrow as much as 6 or 7 times your salary for a mortgage.
Nevertheless, the answer to how much you can afford is different for everyone. It is because the required values of the variables in the mortgage equation vary from person to person.
If you are attempting to determine how much house you can afford, here is everything you need to keep in mind.
How can I determine my mortgage affordability?
While your salary and credit scores remain the obvious considerations, lenders tend to look at a much broader scale- they evaluate your whole financial standing before lending money. They will assess all your monthly debts and sources to figure out the mortgage which you can afford and pay back smoothly.
It is never recommended to go for a mortgage that is beyond your financial capacity. To help you have a clear idea beforehand about what loan you are eligible for, we have listed all the variables.
Note: Always be truthful and realistic about your incomes, debts, and all the other considered factors. Never go for a mortgage that is expensive than your financial status. It avoids you to wind up with a mortgage that you can’t pay. Also, keep some breathing room in your budget when planning for a mortgage for unexpected costs or emergencies that can emerge anytime.
Following are the crucial factors that guide your mortgage approval.
- Credit Score: Evaluating your creditworthiness to know if you are a responsible borrower who will always prioritize mortgage payments no matter what the circumstances.
- Down Payment: Bigger down payment gives the borrower equal equity in the house and reduces the lender’s risk in case if the loan defaults.
- Monthly Gross income: Monthly gross income helps evaluate the following two factors.
- Debt to income (DTI) ratio: It compares your monthly income to your monthly debt. It shows the lender the borrower’s bandwidth to consume more debt.
- Front end ratio: It is also known as the mortgage-to-income ratio. It indicates the amount of an individual’s income allocated to mortgage payments.
Keeping all these factors in consideration, lenders incline to give the lowest rates to applicants with the highest credit scores, substantial down payments, and lowest debts.
To know how does it impact the lender’s decision, read below.
How many times my salary can I borrow for a mortgage?
Your income evaluates the following primary factors:
Debt to income ratio:
In the sphere of the mortgage loan, your income is always viewed in the context of your debt.
Lenders do not just offer you a larger mortgage based on your considerably high income. Instead, lenders ask the discretionary income.
You will be granted less amount for the mortgage if the amount of your debt is higher.
Conversely, if you succeed to keep your debt low, you may borrow as much as 6 times your salary.
Here’s how to calculate your DTI:
Firstly, add your total monthly debt. Secondly, divide it by your gross monthly income. The result shows show much you bought a home before deductions and taxes.
Front-End ratio or Mortgage to Income ratio:
This ratio indicates the portion of an individual’s monthly gross income (pre-tax) which is allocated to mortgage payments(both principal and interest). Ideally, mortgage lenders want their borrowers to keep this front-end ratio below 28%. However, many lenders allow borrowers to exceed the limit of 28% to 30-40%.
The total amount of money that constitutes your monthly mortgage payment includes four components. These are known as PITI: principal, interest, taxes, and insurance (both private and property mortgage insurance, if it is required by the mortgage lender).
You can calculate it by the following mentioned steps:
Divide your expected monthly mortgage payment by your monthly gross income.
How does my credit score impact how much you can borrow for a mortgage?
Your monthly mortgage payment is dependent on the loan’s interest rate. Lender set this interest rate differently for each borrower based on his/her credit score.
As the name suggests, a credit score tells about a consumer’s creditworthiness. It is a crucial factor in presenting yourself as a potential and responsible borrower to the lenders. The credit score is based on credit history which includes the total levels of debts, repayments, and other elements.
For securing lower interests rate, borrowers with higher credit scores are prioritized. This happens because they are able to show a good debt repaying history. For the lenders, this is very important as it reduces the risk of the borrower defaulting on their mortgage payments.
In the contrast, a person with a lower credit score might have to pay a higher interest rate or may even face rejection of the application.
There is no particular credit score applicable for every mortgage loan. It varies from lender to lender and is based on the type of loan applied.
Therefore, it is important to get your credit reports in order and checked by popular agencies before you apply for a mortgage loan. In case of any negative remarks, you must be able to claim them wrong with valid evidence like providing payment history, etc to the mortgage lender.
To what extent does my down payment affects my mortgage affordability?
Down payment is the initial payment made when something is bought on credit. Similarly, it is the amount that you can afford to pay at the beginning of buying a residence using cash or liquid assets.
Eventually, the size of your down payment decides the amount of the mortgage payment made monthly to pay the rest of the mortgage loan.
Typically, lenders ask for a down payment of 20% of a home purchase price. However, most of the lenders also allow the borrowers to purchase the mortgage at considerably lower percentages.
The more you can put down, the less financing you require. It reduces your monthly payments for the mortgage. In addition, lenders look up to it as a low risk deal.
For example, if a home-buyer is eligible to pay 10% on a $100,000 home, the down payment is $10,000, which implies that the homeowner must finance $90,000.
Moreover, it also helps you in qualifying for the mortgage if you have a higher DTI by putting down with a larger down payment.
Decide your amount of payment wisely by keeping a balance. It should not be too little to affect your mortgage application or not too much to drain all your savings and inviting financial emergency in near future.Note that the restrictions of these variables vary from lender to lender. Some lenders might also like to add some other extra limitations based on certain circumstances. However, the above-mentioned primary factors remain the general valid guidance.
The Bottom Line
The cost of buying a home is one of the largest personal expenses that most people ever face. It is advised to take time to do the calculations beforehand using a mortgage calculator and considering above mentioned influential factors.
Skipping this might get you into enormous debt, for which you have no monetary capacity to deal with. Therefore, before you buy a new residence, consider the impact of your future mortgage payments on your budget and lifestyle in addition to the cost of buying the house.
In case if you have any further questions, we have got the answers.
What is borrowing power?
Lenders describe it as the mortgage amount you can borrow. It is based on your financial circumstances. The amount you earn, the debts which need to be paid, and the amount you have saved as a deposit, etc affect your borrowing power.
What factors affect my mortgage affordability?
The primary factors which decide the mortgage you are eligible for are gross income, credit score, and down payment. Lenders can also impose some additional restrictions for qualifying for the mortgage loan.
Do I need to find a home before doing mortgage calculations?
To be at an advantage compared to rival buyers, it is better to start the process of your mortgage calculations before you even find a home that you seriously intend to buy. This helps you have a clear idea about the numbers that you can punch including the down payment, income, and expenses.
How can I borrow a larger mortgage?
If the results of the mortgage calculator shown are sufficiently low to buy the mortgage you want, do not worry. You can increase your mortgage amount by saving a bigger deposit, finding a guarantor, or talking to a broker.
How does a mortgage calculator work?
Generally, to calculate how much mortgage one will qualify for, it takes into account the following things: The annual income, the anticipated loan term, and interest rate along with your monthly debt payments and expenses.
Nationwide how much can I borrow?
With a Nationwide mortgage, you can borrow up to 85% of the purchase price of your home.