How much can I borrow?
The Question "How much can I borrow?" for a mortgage has no "one" answer. Ask 5 different lenders and you may get 5 different quotes. Don't worry though...you can get a pretty close on what you can expect to borrow on your own... You can follow the process below and use our affordability calculator, which will you a good estimate of how much money a lender will approve. Let's try to keep the process simple and straight forward with a chart first, then we'll explain "in-depth" how lenders come up the monthly payment as well as the total loan amount you qualify for. Take a look below at some examples...here's a very generic chart based on your potential mortgage situation:
Interest rate: 6%
Terms:30 year
Your Gross annual income: see below
Your Monthly debt:$400 (car payment and credit cards)
Annual Taxes: $2000 annual taxes
Mortgage insurance :$500 annual
Lets see how changing your gross annual income only affects the amount you may borrow... Gross Annual Income: $50,000, your maximum loan amount will be about $148,778 or $892 per month. Gross Annual Income:$55,000, your maximum loan amount will be about $173,630 or $1041 per month. Gross Annual Income:$60,000, your maximum loan amount will be about $198,815 or $1192 per month. Gross Annual Income:$65,000, your maximum loan amount will be about $261,600 or $1308 per month. Gross Annual Income: $70,000, your maximum loan amount will be about $237,678 or $1425 per month. How do we come up with these numbers? Lenders consider 2 key ratios, front end and back end when determining your maximum loan amount. First know that your front end ratio is simply 28% of your gross monthly income. Your housing expense ( principal, interest, tax and insurance) should not exceed 28% of your gross income, as a basic guideline. The other ratio lenders look at closely is the back end ratio or 36% of your gross monthly income, including all your OTHER monthly debts as well... like student loans, car loans and credit cards. Front end first - For example...you make $50,000 a year, gross income. This puts your gross monthly income at $4166 , so your front end ratio, 28%, is $1166. The property you are considering has a $2000 annual tax bill and $500 annual homeowners insurance. Back end ratio - Next, calculate your back end ratio, which is 36% of $4166 or $1500. Next add up all monthly obligations, for example:$200 monthly car payment, $ 50 monthly credit card bill, and $100 monthly student loan payment. Total $350. Subtract this amount from your back end ratio like this: $1500-$350 = $1150. At this point we'll compare the front and back end ratios and choose the smaller amount - which is the back end ratio @ $1150 - we'll use this to finish the calculations. Next subtract $1150-$208(monthly tax and insurance) to get our maximum monthly housing payment, $942. We do this because to find the PI portion of your monthly payment Finally, we'll back into a total loan amount you can borrow by using which is $157,117. Notice that we didn't even manipulate your interest rate? We kept it constant in the examples at 6%. Keep in mind... the interest rate you are offered is based on your credit. So...how's your credit? Lower credit scores mean higher interest rates which is part of our equation above. Try bumping the interst rate in the exmples above and see what that does to the amount you can borrow. It pays to have good credit!! You will save tens of thosands of dollars over the life of the loan by lowering your interest rate by even 1 point. Here is a simple affordability calculator that makes this explanation very simple to execute.
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How much can I borrow?How Much Mortgage Can I Afford?