This seems to be the question everybody asks when it comes to mortgages. And it’s an important question. How much can I borrow for mortgage? If the thought has never crossed your mind, you may wonder what the big deal is about purchasing real estate with a mortgage. For many people, this is one of their biggest personal investments.
Before we get to the big question, have it at the back of your mind that several factors influence how much you can borrow for a mortgage. You’re not just going to walk into a bank and have a loan handed to you at your request. There are important factors to evaluate, such as your finances, your preferences and priorities.
There’s no rule book to tell you how much you can borrow; the important thing here is that you’re able to pay off every last dime. Meaning it’s only logical that you borrow what you can afford to make periodic payments till the loan is completed.
When borrowing for a loan, you can’t afford to make your calculations on pipe dreams or let’s say unrealistic expectations. All your preparations towards borrowing should be based on practical deductions. By this, I’m trying to say that you need to be a hundred per cent sure of what you’re doing so you don’t find yourself out of your home before you know it. You can do this with the help of a home mortgage calculator which fortunately has a wide variety for you to choose from.
Meanwhile, here are some other nuggets to help you figure out how much you can borrow.
- Gross income
For newbies, this is the bulk of your income before all the little piranhas like tax and bills come to take a bite out of it. Gross income encompasses part-time and full-time earnings, self-employment earnings and any other source of income like alimony, child support, social security benefits etc.
- Credit Score
This is the other end of the stick in borrowing. Currently, financial institutions can ascertain your risk levels through a formula. This formula is applied using your credit score. You may want to have a credit score to avoid obscene interest rates when you finally get the loan.
- Front-End Ratio
This ratio is influenced by gross income and is also known as a mortgage-to-income ratio. Front-end ratio sums up the percentage of your annual gross income that can be channeled into monthly mortgage payments. Generally, four modules constitute your monthly mortgage payments.
These modules are known as PITI, i.e. principal, interest, taxes and insurance. Insurance here includes both private mortgage insurance and property insurance should your mortgage require it. In the meantime, it will be of great benefit to you if your PITI-based front-end ratio does not take more than 28% of your gross income. You may have seen mortgage lenders allow borrowers to exceed this limit up to 30 and 40%, but the safe limit should be 28%.
- Back-End Ratio
This sums up the percentage of your gross income mandated to cover debts. Another word for this is debt-to-income ratio (DTI). Some of the debts included in this bracket are outstanding loans such as car loans, student loans, business loans etc. child support, credit card payments and so on. Here is how it works; if you pay $5000 monthly to cover debt services and your monthly salary is $10,000, 50% is what your ratio will be since you dedicate half of your monthly income to handle debts.
By recommendation, however, your back-end ratio ought not to top 36% of your gross income. You can do the math yourself on your maximum monthly debt using the ratio you’ve just read. Now multiply your gross income by 0.36 and divide by 12. Note that a low back-end ratio means extra points for you.
Now that you know the factors that determine how much you can borrow, I guess you can then answer the question yourself once you have done your calculations. Borrowing to payback doesn’t have to be the awful experience you’ve sometimes heard it to be if you know what you’re doing. And after reading this article, I’m sure you do now.