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How Do Mortgage Lenders Decide How Much You Can Borrow?

By
Real Estate Broker/Owner with Tom Crimmins Realty

When you visit your lender to get a mortgage for your home, they will tell you the maximum amount that you are allowed to borrow. But how do they reach this total and what factors do they take into consideration?

How do they determine that one borrower can take on a bigger mortgage than the next?

This decision is made by mortgage companies by considering a wide range of factors, including your credit information, your salary and much more.

Here are some of the common ways that lenders determine how much you can borrow:

1. Percentage of Gross Monthly Income

Many lenders follow the rule that your monthly mortgage payment should never exceed 28% off your gross monthly income.

This will ensure that you are not stretched too far with your mortgage payments and you will be more likely to be able to pay them off. Remember, your gross monthly income is the total amount of money that you have been paid, before deductions from social security, taxes, savings plans, child support, etc.

2. Debt to Income Ratio

Another formula that mortgage lenders use is the “Debt to Income” ratio, which refers to the percentage of your gross monthly income that is taken up by debts. This takes into account any other debts, such as credit cards and loans. Many lenders say that the total of your debts shouldn’t exceed 36% of your gross monthly income.

The lender will look at all of the different types of debt you have and how well you have paid your bills over the years.

By using one of these two formulas, your mortgage lender calculates the size of a mortgage that you can afford.

Of course, there are many other factors that need to be considered, such as the term length of the loan, the size of your down payment and the interest rate.

Remember that when factoring in your income, you usually have to have a stable job for at least two years in a row to be able to count your income.  

If you want to increase your chances, you could consider paying down your debts or buying with a co-borrower, which will improve your debt to income ratio.

Les & Sarah Oswald
Realty One Group - Eastvale, CA
Broker, Realtor and Investor

Hi Thomas,

Very good review on how much of a home you can qualify for when shopping for a loan... Many people shop for homes like they do a new car. You go out to the dealership and pick one out and try to get the lowest price from the salesman. Then the last thing they do is talk to the finance department to figure out monthly payments and see if they qualify. Talking to the finance office should be the FIRST thing you do before looking for a new house! Thanks for the informative post!

Mar 14, 2014 07:40 AM
Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland

Lenders MUST follow these mandates/ratios today or stand to be fined.

Being a loan officer involves a lot of pressure today.

Mar 14, 2014 08:09 AM