When purchasing a home becomes your goal, one of the first things you need to consider is how much of a loan you can afford. This decision has two main components. First, you need to consider how much money you consider the top amount you can afford to pay each month towards a mortgage. You do not want to overextend yourself financially. The second component is determining how much the lender will give you to buy a home. This is dependent on many factors.
How Does the Mortgage Lender Rate You?
Mortgage loans are long-term, highly expensive loans. That is, you’ll be working with this lender for a long time. The lender wants to ensure that you have the financial means of repaying the debt. To do that, it looks at a number of factors to make this decision. Some of those include the following.
Your Debt to Income Ratio
A key factor to determine how much you can afford in a home is to look at your debt to income ratio, which is what it sounds like. How much debt do you have? How much income do you have? Generally, lenders will want this percentage to be under 36. However, every lender establishes its own rules for how high this is. To determine what your debt to income ratio is, simply divide your monthly debt by your monthly gross income, or you can use this mortgage calculator.
Your credit score is important, but there are multiple components of that score that mortgage lenders are looking at to determine if they should loan you the funds to purchase a home. This includes the following information:
- Do you have a credit history? Lenders want to know that you have used credit previously and that you, hopefully, have an overall positive credit history. Those who have limited or no credit history may not qualify as easily for a loan.
- How much debt do you have? Again, this plays into how much you can afford, but it also provides hints to lenders about the type of borrower you are. Are you the type of borrower that runs up his or her credit to the maximum amount and pays the minimum each month? That’s not as favorable as someone who keeps debt as low as possible.
- What types of credit do you have experience with? If you were a homeowner previously with a solid track record, this is good for you. Do you only have high interest rate credit cards? This isn’t as good because it doesn’t show wise financial management,, especially if you have larger balances.
While your actual credit score matters, lenders also want to see how you use credit and if you manage it well. That helps the lender to determine how much risk you present to them.
Need to know what your credit score is? You can get a free one here without signing up for anything or entering credit card information.
Down Payment Requirements
Depending on the type of mortgage loan you obtain, you will likely need a down payment of between 3.5 percent and 20 percent. The down payment is the amount of cash you’ll be putting from your savings account into the purchase of a home. Lenders expect you to do this for several reasons.
- It lowers the amount of debt you are taking on
- It reduces the lender’s risk since you are less likely to walk away from a home you’ve invested 20 percent into
If you qualify for a Federal Housing Administration loan (or FHA loan) you’ll qualify with just 3.5 percent down. However, the more you have to put towards the loan, the better.
Do You Qualify?
You can find out how much of a mortgage you qualify for, most likely, with the use of a mortgage calculator. Mortgage calculators are free-to-use tools that provide a basic amount of information about how much a loan will cost you monthly. However, it does not necessarily tell you what requirements the bank will place on you to obtain a loan. Use them to help you to decide how much you want to borrow.
Overall, lenders look at all of these factors to decide if they should lend to you. In addition, this information provides details about how much the lender should give to you, too. The better of a risk you are, the more you’ll qualify to borrow.
Find a Lender: Credit Sesame has a great tool to find the right lender for you. Check it out here.
Ready to Apply for a Loan: Here’s a quick and easy three-step home loan application that can connect you to a range of lenders.