How Much Do I Qualify for With a Mortgage Loan?
When you enter the real estate market to buy a home, you need to know how much home you can afford. This typically includes consideration of a mortgage and how much financing support you can get from a mortgage lender. You can work with a mortgage consultant to get a sense of how much loan you can get. You can also perform some basic analysis to get an idea yourself.
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Basics
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A mortgage loan is financing from lenders used to complete the purchase of a home. Most buyers rely on mortgage lending, as they cannot afford to pay cash for their homes. Lenders review the financial qualifications of prospective homebuyers to determine whether to issue a loan and for how much. Lenders review your credit rating, income, assets and liabilities to make a determination about how much loan you can afford to repay.
Debt-to-Income Ratio
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Lenders typically use two key ratios to determine how much loan you can afford. The first is called debt-to-income ratio. This is a comparison of your total monthly debt obligations relative to your monthly income. The standard maximum ratio is 36 percent of your income applied toward debt, according to Lending Tree. Personal debt, auto loans and other debt commitments are all considered part of this total. This ratio serves as a guide, but some flexibility exists when you appear more or less capable of meeting your loan obligations.
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Mortgage-to-Income Ratio
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The mortgage-to-income ratio is similar, but only considers your monthly mortgage obligations as a percentage of income. The standard maximum lenders recommend you invest in a mortgage is 28 percent of your monthly income, according to Lending Tree. This is a more simple calculation as you just take 28 percent of your income to decide how much you should invest in a mortgage. If you have little-to-no other debt, you might get away with a higher mortgage-to-income ratio. On the contrary, if you have exceptionally high other debt and expense commitments, you might take a more conservative approach with a lower ratio.
FHA Loans
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Another consideration for lower credit borrowers with little funds available for a down payment are FHA loans. FHA loans are available through the government-backed Federal Housing Authority. FHA loans are insured against loss and limit the risk of lenders. Thus, they are offered with a minimum down payment of 3.5 percent of the home's value, according to the Housing and Urban Development website. FHA loans have higher ratio standards with a normal allowance of 29 percent debt-to-income and 41 percent mortgage-to-income. However, these numbers take into account required mortgage insurance, which adds to your mortgage costs.
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