How much can I borrow? How
much can I afford?
How much you
can borrow and how much you can afford many times are two totally different
things. Lenders will often times approve you for a mortgage that is probably
more than you can COMFORTABLY afford because they are lending to you based
mainly on credit and debt to income ratios. You may have numerous other
things that you spend your money on that are not taken into consideration
for the homebuying process. For example you may like to invest 25% of your
pay towards retirement and investment accounts. However, this figure is not
taken into consideration when approving you for a mortgage or when
calculating how much you can borrow. Also, you may like to go to the spa
weekly, pay for a gym membership and take a vacation every 2-3 months,
however again this is not going to be calculated into your debt to income
ratio and used to figure out how much you can borrow. Thus, if you want to
remain in your same lifestyle and not have to change things much, typically
how much you can afford to pay on a mortgage is going to be less than what
you might be able to borrow. You do not have to take out a mortgage in the
amount that you are pre-approved for. You can take out a mortgage more based
on how much you feel you can comfortably afford and not based on how much
the bank feels you can afford.
Your loan officer and/or broker will tell you how much you qualify for after they review your application and pull credit. The loan amount depends on income and debt ratio.
The loan amount depends on income and debt ratio
When you are purchasing your house, the first thing you should consider is how much monthly payment you could handle. If you set your monthly payment limit, then the loan officer can show you how much money you can borrow through different types of financing options.
The Debt Ratio is calculated by dividing the borrower's monthly gross income by the borrower's total monthly expenditures.
When refinancing your home, the amount of money you are able to borrower is directly related to your FICO score, the amount of equity available to borrow from, and your Debt to Income Ratio. People with higher FICO scores can borrower to a higher LTV than people with lower FICO scores. No matter what your FICO, the higher the Loan To Value, the worse the interest rate will be on the refinance. Generally, there is no difference between 30% and 50% LTV, but there is a HUGE difference between 70% and 90% LTV. The closer you get to the actual value of the home, the more risk it puts on the lender. They will require more from you in higher FICO scores, provable income, provable assets, and will apply more of a penalty towards you in terms of your interest rate.
If you're pulling the cash out for investment, make sure your rate of return is higher than both the additional interest you'll pay as well as the cost of the refinance.
Just because your mortgage professional says that you can borrow a certain amount, it does not mean that you have to find a home for that price. You need to be comfortable with your mortgage payments and loan program. You will have monthly expenses that are not factored into your debt ratio, which could make making your mortgage payment difficult some months.
Different home loan programs may allow you to borrow more or less depending on the guidelines, rates and repayment methods. Some examples of this are: A 3/1 ARM may allow you to borrow a little more than a 30 year fixed rate mortgage since it will usually have a lower interest rate. An interest only loan may allow you to qualify for more of a loan than a regular amortizing mortgage for 30 years also since it will have a lower payment. A 20 year fixed rate loan may not allow you to qualify for as high of a loan as a 30 year fixed rate loan since the payment on the 20 year mortgage will be higher.
When factoring how much you can borrower and how much you can afford you should pay close attention to unforeseen cost down the road. Buying a home at the top of your budget can cause you financial hardships down the road if there are any issues that come up. You do not want to be house poor, which means all you can afford every month are the essentials and house payment, this will not leave you any room with other expenses.
If your debt to income ratio is too high but you are comfortable with your monthly payment you could consider a "No Ratio" loan. No Ratio loans usually require a strong credit history, good employment history, or a sizable down payment. The added risk of a no ratio loan will mean a slightly higher interest rate than a full documentation loan.
There are several types of loans in the industry today No doc, Lite doc, Stated Income the most important thing to remember is not how much you can qualify for but how much you can afford to PAY for monthly, A home can be your greatest investment, losing it can be your worst.
If you have any questions regarding our products, you can contact us by calling or e-mailing us and we'll get back to you as soon as possible. Thanks!
Information listed above is to be used for educational purposes only and is not guaranteed