All mortgage lenders want to know your ability and the likelihood of your repaying the money you borrow. So you have to pass a few tests. The lender calculates the maximum amount you can borrow when taking out a real estate loan.
For a home in which you will reside, lenders total up your monthly housing expense. They define your housing costs as:
Mortgage Payment + Property Taxes + Insurance
A lender couldn't care less about the money you spend for dog food, vacations, or supporting local restaurant owners. Good thing, or you might not get the loan!
Lenders will loan you up to about 33 percent of your monthly gross income (before taxes, that is) for the housing expense. If you're self-employed, this figure is the net income from the bottom line of your federal tax form Schedule C.
Although lenders don't care where you spend your money outside your home, they do care about your other debt. A lot of other debt diminishes the funds available to pay your housing expenses. Lenders know
that debt increases the possibility that you may not make your monthly payments.
When you have auto, credit card, or other types of debt requiring monthly payments, lenders calculate another ratio to determine the maximum you can borrow. To your monthly housing expense the add the amount you need top pay down your other consumer debt. These total costs typically cannot exceed 38 percent – anything higher and most lenders will reject your loan application.
Lending rations vary slightly from lender to lender. Some lenders, for example, may allow your housing expense to reach up to 36 percent of your monthly income. Others may allow the ratio of housing expenses plus other consumer debt payments to reach up to 40 percent of your gross income.
The maximum amount that a lender will loan you depends on interest rates. If rates fall ( as they have during much of the past decade), the monthly payment on a mortgage of a given size also drops. Use our mortgage qualifier calculator to determine the maximum size mortgage you can get.