When you’re thinking about buying a new home, ask yourself, “How much should I borrow?” instead of, “How much could I borrow?” It’s an important distinction: Rather than focusing on the largest loan amount you could possibly get from a mortgage or home equity line of
credit, this approach focuses on the amount that fits your budget. Working out a monthly household budget (one that includes any additional expenses that come with homeownership) can help tell you how much you should borrow. After all, you don’t want to stretch your budget to its limit in order to accommodate a loan. Use our
Affordability Calculator to get a full picture of your pre-tax income, your current debt payments (such as credit cards, student loans and car loans or leases), your savings and how a new or additional loan payment could fit into your financial picture. Remember to include in your budget all the potential costs of a new home such as utilities and private
mortgage insurance. View tips for first-time homebuyers Once you’ve factored in all the costs and found the monthly mortgage payment that fits your budget, talk with your lender and have them help you translate
that payment into a realistic mortgage, loan or home equity line of credit amount. When comparing different loans or lines of credit, make sure you clearly understand their terms and would feel comfortable with the monthly payments
throughout the life of the loan or line of credit. And if a lender says you can afford more than what you’ve budgeted, seriously consider whether this would be a stretch for you – and don’t hesitate to stick to a smaller amount. If a lender tries to pressure you into accepting a loan or monthly payment you’re not comfortable with, choose a different lender. You may also want to consider
prequalification. While prequalification doesn’t give you a loan commitment or a guarantee, it’s a good first step to see the amount and type of loan a lender could offer you. Finally, keep in mind how much you can afford to borrow without putting the rest of your financial plans on hold. This can help you build a stronger future, because you’ll be better informed and
better equipped to be a successful homeowner.Should vs. could
After you’ve set your budget
The best way to think about how much home you can afford is to consider what your maximum monthly mortgage can be. As a general rule of thumb, lenders limit a mortgage payment plus your other debts to a certain percentage of your monthly income, which can be approximately 41%.
Resources
Glossary of terms
- Desired mortgage amount
- Monthly housing expenses
- Monthly liabilities
- Monthly housing payment
- Maximum principle and interest
- Start interest rates
- The term in years
- Real estate taxes
- Hazard insurance
- Association dues or fees
- Monthly PMI
Desired mortgage amount
The amount a borrower agrees to repay, as set forth in the loan contract.
Monthly housing expenses
Monthly outlay that includes monthly mortgage payment plus additional costs like property taxes and homeowners insurance, as well as other potentially applicable costs like mortgage insurance, flood insurance, homeowners association or co-op fees, or special tax assessments.
Monthly liabilities
Amounts of money that you owe to another person or entity. Liabilities can be short-term like credit card payments or longer-term like car loans or mortgages.
Monthly housing payment
A mortgage payment that includes PITI (principal, interest, taxes, insurance).
Maximum principle and interest
Calculated by subtracting your monthly taxes and insurance from your monthly PITI payment to calculate the maximum principle and interest (PI) payment to determine the mortgage amount that you could qualify for.
Start interest rates
The introductory interest rate, also known as the teaser rate or start rate, on an adjustable or floating-rate loan. It is usually lower than most other interest rates and often stays consistent within a specific time frame only.
The term in years
Mortgage terms aren’t limited to 30 and 15 years. Plenty of buyers prefer other options like 10-year, 20-year, 25-year, 40-year, and even five-year terms, based on their monthly income and budgetary goals.
Real estate taxes
Charged on immovable property, including land and structures that are permanently attached to the ground, such as a house or building. When you buy a home, you must pay real estate taxes, also known as property taxes, directly to your local tax assessor or indirectly as part of your monthly mortgage payment.
Hazard insurance
Insurance coverage for the structure of a home.
Association dues or fees
Required by some condominiums and neighborhoods as part of a homeowners’ association (HOA). Dues are typically paid directly to the homeowners’ association (HOA) and are not included in the payment you make to your mortgage servicer.
Monthly PMI
Stands for private mortgage insurance, which is a type of mortgage insurance you could be required to pay for if you have a conventional loan. PMI is typically required when you obtain a conventional mortgage and make a down payment of less than 20 percent of a home’s purchase price.
Commonly Asked Questions
For most buyers, obtaining a mortgage and buying a home is the largest financial undertaking they will complete in their lifetime. Homes appreciate in value and are typically considered a sound investment for most applicants.
But committing to repay a large amount of money can be confusing. Let’s look at the most commonly asked questions that pop up during the process.
Lenders consider two main points when reviewing loan applications: the likelihood of repaying the loan (typically determined by a credit score) and the ability to do so (typically determined by proof of income).
Nerdwallet.com explains that mortgage income verification, even if they have impeccable credit, borrowers still must prove their income is enough to cover monthly mortgage paymen
Conclusion
In conclusion, the primary factors for mortgage approval are credit score, income, existing debt, and down payment. As a savvy consumer, you can run scenarios with various inputs to find the right mortgage lending solution for you.
Once you procure a mortgage, be sure to pay your payments on time and include extra principal payments as available. These actions will ensure you are able to refinance should mortgage rates become more desirable.
Home-ownership is a journey and a dream for most Americans. Use the research we’ve compiled to make the most of your adventure toward owning a home.
Disclosure
The information provided by these calculators is for illustrative purposes only. Results do not reflect all loan programs and are subject to specific loan limits. Qualification, rates and payments will vary based on timing and individual circumstances. This is not a commitment to pre-approve or lend. Be sure to consult a financial professional prior to relying on the results. The calculated results are intended for illustrative purposes only and accuracy is not guaranteed.