How Much Mortgage Can I Afford?

by Praveen Singh SEO Manager

Applying for a mortgage loan to buy a house is an extensive personal investment. Like other mortgage applicants, you are wondering, 'how much mortgage can I afford.'

Numerous factors determine how much mortgage you can afford. Below is everything that lenders consider to determine how much mortgage you can afford.

How Much Mortgage Can I Afford?

Most homeowners can afford a mortgage 2 or 2.5 times their annual gross income. Therefore, under this general formula, if you earn $200 000 a year, you can afford a mortgage of between $400,000 and $500,000. However, this is a mere general guideline.

When conclusively determining how much mortgage you can get, your lender will put in additional factors. First, the lender will evaluate your financial situation and how much they think you can afford.

Second, as a borrower, you need to research and determine which home you would like to live in and which consumption expenses you're willing to forego.

What Information do Lenders Use to Determine My Mortgage Loan Amount?

Although each lender will use their unique criteria to determine your loan affordability, there are some general factors every lender will consider. These factors include;

Gross Income

How much do you earn before paying taxes and other financial obligations? Your gross salary and bonus income make your gross income. Other sources of income like part-time earnings and earnings from self-employment are factored in as well.

Back-End Ratio

Often known as DTI- Debt-to-Income ratio, the back-end ratio is a percentage of your total gross income to your debts. For example, your credit card payments, outstanding loans, and child support are categorized as debts.

For example, if you earn $5,000 monthly and $2500 is deducted under debt services, you use half your income to pay the debt. Unfortunately, lenders consider a 50% back-end ratio alarming and will reduce the amount of mortgage you can borrow. Therefore, mortgage lenders recommend working on your DTI and maintaining it below 43%.

Front-End Ratio

It is a ratio that determines how much of your yearly gross income you can dedicate to paying your mortgage. Your mortgage repayments consist of the loan principal, interest, tax, and insurance. Therefore, gross income will significantly help determine your front-end ratio.

To afford a high mortgage, ensure that your front-end ratio based on the mortgage repayments should be less than 28% of your total gross income. Nonetheless, some lenders can allow as much as a 30% front-end ratio.

Credit Score

To assess your risk as a borrower, lenders will use your credit score information. Your credit score determines how much mortgage you can afford and at what rate. Therefore, ask for a copy of your credit score from a credit bureau and counter-check that all the information presented is accurate.

How Much Will I Pay as Down Payment

When taking out a mortgage, your lender will ask you to pay some proportion of the total house cost as a down payment. Down payment is an out-of-pocket expense that you can afford to pay for the house either in cash or through liquid assets.

Most lenders will ask for a 20% down payment of the total purchase price of the home. The higher the down payment, the less financing help you will need.

For example, if you would like to buy a home worth $40,000, and you pay a 20% down payment, you will only need to borrow $32,000. Therefore, the banks will consider you at less risk and offer you enough mortgage.

Lenders will also consider the mortgage duration. How long will the mortgage go for? A short-term loan attracts high monthly payments, but overall, it tends to be cheaper than long-term mortgage loans.

How do Lenders Decide How Much Mortgage I Can Afford?

There are numerous factors that lenders will consider when determining your affordability as a borrower. However, they narrow down to your income, assets, debt, and liability. Your lender will need to know how much income you make and the total demand on the income to assess whether you can handle additional debt.

Your income and down payment also are used as a base to assess whether you qualify for financing. Credit history is also assessed to forecast your ability to repay the loan over the mortgage period.

How Much Mortgage Can I Afford on My Salary Calculator?

If you want to determine how much mortgage you can afford using your salary calculator, crunching the numbers is a good place to start.

How much do you and your co-buyer or partner earn every month? When calculating your income, account for all revenue streams, including alimony, rental earning, and investment profits.

What does your estimated housing cost? How much down payment do you think you can afford? Factor in the estimates, mortgage interest rate, property tax, homeowners insurance, and loan terms. Most people prefer a loan repayment period of 30 years, although some also opt for short-term mortgage loans.

How much do you spend on expenses every month? Tally up your total expenses or money that goes out every month. Your expenses are important in determining how much more you can spend on your monthly repayments.

Input the above information on a mortgage calculator and get an idea of how much mortgage you can afford.

Follow the 28/36% Rule

To increase the amount of mortgage you can afford, consider using the 28/36% rule, which most financial advisers advocate. You should spend less than 28% of your gross income on housing expenses and less than 36% on total debt. This home affordability rule has been tried and tested and helps establish a baseline for the total amount you can afford to pay the monthly mortgage.

Take Away

How much mortgage you can afford depends on how much you earn, your expenses, and your debt. Other factors like your credit score and the amount of down payment you can raise can also help increase the total amount of mortgage you can afford.

Knowing how much mortgage you can afford will help you take financially sound steps as you apply for a mortgage. Use our online calculator to determine how much mortgage you can afford quickly.