How Much Mortgage Can I Borrow?
The question "Mortgage How Much Can I Borrow" is common among those looking to refinance their current mortgage or those seeking to purchase a new home. We will explain the factors that determine the maximum amount that you will be qualified to borrow for your home loan. These factors relate to your Income, Credit, and amount of Equity qualified to be financed, also known as “ICE”.
- Debt-to-Income Ratio (DTI) Credit Score Loan-to-Value Ratio (LTV)
The Debt-to-Income Ratio (DTI) is calculated by dividing your total monthly household expenses by your gross monthly income. Your monthly household expenses are all of the items on your credit report such as your mortgage payment, car payment, credit card minimum monthly payments, and also includes monthly property taxes and homeowners insurance. In general, with a good credit score, you will be able to qualify for most programs with a DTI up to .50 (some mortgage programs may limit this number to the .38 to .43 range). See the example below to see how much you could borrow in this scenario with a 6% 30 year fixed rate program.
- Gross Monthly Income: $5,000
- Monthly Car Payment: $300
- Monthly Credit Card Payments: $100
You would then divide the $400 household expenses by the $5,000 income to arrive at an Initial DTI of .08
Now, assuming a 30-year fixed rate mortgage program that allows up to a .50 DTI. we can figure how much you can borrow for your mortgage.
- Estimated Monthly Property Tax: $250
- Estimated Monthly Homeowners Insurance: $50
Next, add the estimated monthly property tax and insurance to your car payment and credit card payments for a total monthly household expense of $700. Dividing $700 by your gross monthly income of $5,000 now results in a DTI of .14
The only item that remains is your maximum new mortgage amount. You can figure how much you can borrow by subtracting the .14 DTI from the program maximum allowed DTI of .50 to arrive at a remaining .36 (this is the amount of cap room remaining for your new mortgage).
Now multiply the .36 remaining times your monthly gross income of $5,000 to arrive at a maximum monthly-allowed principle and interest mortgage payment of $1800.
Using our trusty mortgage calculator for a 6% 30 year fixed rate mortgage shows that you could borrow up to $300,000 in this example. ($300,000 at 6% = $1,798.65 P&I mortgage payment).
It is important to note that your credit score can have an impact on the qualifying Debt-to-Income ratio for mortgage programs. Poor credit scores below a 620 Fico can reduce the maximum DTI to well below a .50. For instance, many with poor credit scores choose to get an FHA home loan, because they are not really score driven, and also offer very competitive interest rates. The only offset, is that the DTI is capped at .43 in most cases. Using the example above, you would be capped at a $1,450/mo mortgage payment instead of a maximum allowed amount of $1,800/mo with a good fico credit score. This can mean the difference between the house of your dreams and one that is just OK.
Loan-to-Value Ratio (LTV)
The Loan-to-Value Ratio (LTV) is the ratio of the mortgage loan amount to be borrowed divided by the home's appraised value (for a home refinance) or sales price
(for a home purchase). For instance, if you are refinancing $80,000 and your home appraises for $100,000, then the LTV would be 80% ($80,000 divided by $100,000).
LTV can be a particularly important aspect to home-buyers, relating to how much you can borrow. Qualifying Loan-to-Value ratios can move under 100% for various reasons. This means that you are financing less than 100% of the home's sales price (for home-buyers) or financing less than 100% of the home's appraised value (for those refinancing).
- Below, are some typical reasons why the qualifying LTV percentage will move below 100% for various mortgage programs.
- Borrower has a low credit score (LTV limits decrease with poor credit scores)
- Specific mortgage program limit (certain lender programs cap LTV amounts)
- Borrower wants to eliminate mortgage insurance (80% LTV or under)
Lower Loan-to-Value limits can have a significant impact, not so much on the maximum amount you can borrow, but on the required funds needed to close your home loan. Say for instance, that you have good income but a less than perfect credit score. You are approved to borrow up to $450,000 and put an offer in on a $400,000 home. The offer is accepted, but the LTV is capped at 90% because of your poor credit. This means that you have to make a 10% down payment of $40,000, plus cover closing costs. Now with escrow deposits, lender fees, third-party closing fees, and mortgage tax, your total closing costs amount to $15,000. You are now on the hook for $55,000 in cash to get into your new home.
I Am Pre-Approved to Borrow Mega-Bucks…Yippeee.
Before you go out and buy that mansion with the cement pond, we encourage you to go over your budget first (we are really not trying to rain on your parade, but gee whiz, someone has to!).
Seriously, before you set out to go home shopping, or refinance for that matter, you should work the numbers first. Just because you can borrow up to a certain amount, doesn't mean that you will be able to make the monthly payments easily. There are many things not figured into your loan qualification, such as groceries, gas, clothing, entertainment, home repairs, car repairs, etc. It would be a good idea to figure what maximum loan payment (including taxes and insurance) you will be able to make within your comfort level. Figure your “real” monthly expenses and include an amount for the unexpected. Add all of your real housing expenses together and subtract that from you “take home” pay. What remains should give you a better idea of the mortgage payment you will be comfortable with. We only point these things out because we care! So many people have lost their homes because they neglected to go over the numbers first. We don't want you to be the next!
Where To Go From Here?
The Mortgage Answers Network highly recommends that you visit The Refinance ToolBox. We have ranked this mortgage website as the
The Refinance ToolBox was developed for those who want to learn more about mortgages in laymen's terms. You will learn about the home loan industry from the inside out. The information, tips, and lender tricks exposed could save you thousands on your mortgage. Visit and Bookmark the Refinance ToolBox now!
We hope that the information provided here was helpful to you in your search for mortgage answers. Cheers and Best of Success with your new home or refinance!