How Do Mortgage Lenders Decide How Much You Can Borrow?
When you apply for a loan, your mortgage lender informs you of the maximum amount you can borrow, and this will help you get an idea of how much house you can afford. The question most buyers ask is how they reach this amount and what factors influence their decision?
Read on to understand the most common factors that lenders look at to know how much you can borrow.
Factors That Lenders Use To Determine Loan Amounts
Most lenders prefer monthly mortgage payments don’t exceed 28% of your gross monthly income. At this percentage, they estimate a borrower will not stretch their budget too far and pay the loan without missing any payments.
Your gross monthly income is the amount you earn before deductions and other obligations, including social security, taxes, child support, savings, alimony, disability, etc.
Be prepared to submit updated paystubs and bank statements as evidence of your income.
One crucial element in securing a mortgage is your credit score. Credit scores are based on your payment history, types of credit, length of credit history, the overall level of debt, and new credit applications.
If a lender finds your credit score falls below a specific range or discovers unfavorable marks, loan approval can still happen, but you’ll likely pay a higher mortgage rate.
That’s why it’s essential to monitor your credit if you plan to apply for a mortgage.
Debt to Income Ratio
Another factor that lenders will examine is your DTI, or debt to income ratio. This ratio gives lenders insight into whether you’ll have enough income to cover both your new mortgage and any current debts you have, like credit cards, student loans, car payments, and the like.
The ratio is calculated by taking your total monthly debt and dividing it by your gross income. For example, an employee who earns $5,000 per month and has $500 monthly debt would have a DTI ratio of 10%.
Most lenders prefer a DTI ratio no greater than 36%.
Ready to purchase your new home?
The two most critical factors you must know before shopping for a home are how much you can borrow from the lender and how much you can afford. We can help you get answers to both of these questions. Our pre-qualification process is available online, and after sharing a few details about yourself and your income, we’ll be able to provide you with a detailed mortgage scenario.
Start the process right from our website and get the clarity and guidance you’ve been looking for from a mortgage professional.