How Much Mortgage Can I Qualify For?
Scott Steinberg6-Minute Read
November 25, 2020
How much mortgage can you qualify for? Good question – and one of the first that you should be asking yourself when shopping for a new property or home loan. Not only will pinpointing the total amount of home mortgage that you are able to obtain help you determine just how much real estate that you can afford. It will also impact the total size of the monthly payments that you must account for, and how much money that you may need to put down in order to purchase a condo, townhouse, or single- or multi-family home.
Mortgage Basics: What Is A Mortgage And How Does It Work?
A mortgage is a form of home loan that serves as a binding agreement between a borrower (i.e. an individual seeking to buy a house) and a lender (e.g. a bank, credit union, mortgage company, or online financial technology provider).
Mortgage loans obligate you to repay the total amount of money borrowed for your home purchase plus interest paid on these sums within preset periods of time. Your financial obligations – which include principal and interest payments – are typically bundled in the form of monthly payments. The interest rates associated with these fee installments may be fixed or variable, and the period of time over which sums must be repaid can alternate (often coming in the form of 15-year or 30-year mortgages). To maintain a good credit history, high credit score, and ownership of your property, it’s essential to make payments in full and prompt fashion. Most mortgages will also require you to put down an initial balance of money as a down payment, or guarantee against sums borrowed (e.g. of 20%), in order to secure them.
Noting this, before pulling up a mortgage calculator and asking just how much mortgage you can qualify for, start by asking yourself some simple questions:
- What is my total annual income including salary, bonuses, capital gains, and dividends?
- How much outstanding debt am I currently carrying?
- Which other debts and obligations do I need to pay regularly – and how much do I need to pay on them in total?
- How much can I afford to spend on housing each month?
- What amount of money am I looking to put down on a home loan up front?
- How much house do I need – and what type of home makes the most sense for my family?
- Have I accounted for property taxes, insurance, homeowners association (HOA) fees, maintenance and repairs, and other expenses that might pop up on a regular basis?
- Do I have money put aside to handle closing costs (expenses associated with the sale or purchase of property) as well?
How Lenders Determine Your Mortgage
Several factors such as annual income, debts, creditworthiness, and other variables come into play when lenders look to determine your eligibility for obtaining a mortgage.
Debt-to-Income Ratio (DTI)
Your debt-to-income (DTI) ratio is one of the first and most important factors that a prospective mortgage lender will take into consideration. A numeric representation designed to provide a brief overview of how likely you are to be able to pay your debts, potential lenders often utilize it as a quick test to determine if you can make payment obligations.
Armed with this measurement, which is designed to reveal whether or not you have enough income routinely coming in to offset the amount of money going out of your household, lenders will attempt to decide if you’re a safe bet. To obtain a DTI, financial institutions total your monthly debt load (accounting for common recurring expenses such as auto loan payments, student loan payments, and credit card bills) and add in your proposed mortgage payment. Afterwards, they divide it by your monthly gross income. For example, say you make $6000 a month. If you carry $300 a month in auto loans and $300 a month in student loan debt, your DTI would be 10%.
In general, it’s best to keep your debt to income ratio below 28-36% of your monthly earnings. However, some lenders may be willing to accept applicants as borrowers who have a higher DTI (i.e. even up to 40-49%) in select cases, though a higher DTI may impact the amount that you are required to provide as a down payment and other loan terms. Under the previous example, you might find yourself approved for a maximum monthly mortgage payment of around $1800. If you were to pay off your car or student loan, you could increase the size of the monthly mortgage payment you were approved for.
Your credit score is also another major factor that impacts your ability to qualify for a home loan, and the total amount of a home mortgage that you can qualify for. Having a strong credit history is key to obtaining a mortgage of larger size, as it enables banks, credit unions, and other financial providers to get a sense of how well that you manage your money. A high credit score can help put their minds at ease, as it indicates that you have a good credit history and are likely to be a safer bet to lend money to as a borrower.
Not only does a lower credit score, which indicates either less of a preexisting credit history, or less timely payment of debt obligations, potentially impact the range of financial opportunities, loan terms, and interest rates available to you. Possessing one may also result in you having to pay higher interest rates and disqualify you from borrowing from certain lenders or limit the total sums that these financial providers are willing to lend. As you might imagine, establishing a strong credit history, and good credit score, is an important first step before reaching out to potential home loan providers.
How To Calculate Your Mortgage
Several factors go into calculating the maximum amount of home loan mortgage that you can afford. Among these key factors are:
- Annual Income
- Cash on Hand
- Credit Score
- Down Payment
- Debt and Expenses
To quickly compute how much home mortgage that you qualify for, we invite you to try our simple mortgage calculator now. By providing the answers to a few brief and straightforward questions, you can find out just how large of a home loan that you’re qualified to receive in minutes.
The 28/36 Rule
Mortgage lenders want you to be as successful at paying your home loans back and meeting debt obligations as you hope to be yourself. That’s why they always look to minimize risk and maximize chances of loan repayment.
To this extent, they’ll be looking to see that you spend no more than 28% of your gross monthly income on housing expenses, and no more than 36% of it on total debt. By following this rule, they hope to maximize your chances of meeting your monthly payments and debt obligations.
By way of illustration, if your monthly income is $5000, they’ll want to make sure that your monthly mortgage payments are no more than $1400, and that you are spending no more than $1800 total on all your outstanding debts when added together.
FHA Vs. VA Loans
VA loans are open to those who currently serve (or have served) in the military and surviving spouses in select cases. They require no down payment or mortgage insurance to obtain, making them highly-coveted.
In contrast, FHA loans are available to all qualifying members of the general public. FHA loans can also be obtained with a lower credit score in certain cases.
Both are backed by the United States government, and each comes with its own minimum credit score and DTI requirements. Likewise, both FHA and VA loans can be used as a financial means to purchase or refinance a primary residence. Neither loan type can be applied to a vacation home or investment property (for which you’ll want to obtain a conventional mortgage not backed by the federal government instead).
Be certain to do your research before committing to either option. Deciding on whether to choose an FHA vs. VA loan will depend on your individual lending terms and circumstances.
How To Increase The Mortgage You Qualify For
The single best way beyond improving your credit score to increase the amount of mortgage that you qualify for is to improve your debt-to-income ratio. Some simple tips and strategies that can help you do so include:
- Increasing Your Monthly Income
- Working overtime
- Pursuing a side gig
- Negotiating a raise
- Maximizing investment gains
- Lowering Monthly Debt Payments
- Paying off outstanding balances
- Paying off debts with the highest interest rates
- Paying off debts with the highest monthly payments
Many factors from your credit score to monthly income to current outstanding debts can impact and influence how much home mortgage that you can qualify for. Several of these factors are well within your power to control.
Individual lenders will also differ in the amount of risk and debt that they’re willing to see you take on. Home loan terms will likewise vary between financial providers. As a result, it’s important to research and review individual mortgage providers and offers before committing to a specific lender. As a general rule, for your own comfort as well as that of home mortgage lenders, it’s important that your total debts, including the proposed mortgage, should be a fraction of your monthly income.
To quickly compute how much mortgage that you qualify for, be sure to check out our user-friendly home mortgage calculator. You can also find out more about home ownership and management in the Rocket Homes Home Buyer Guide now.
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