Borrowing money to pay a mortgage is very common. Discovering how much you can borrow is a major factor that goes into the house you are able to afford. As a future home owner, you are probably overwhelmed with the houses on the market and how they compare to what you can afford. Look at buying a house the same way you would look at buying a small business. It is a huge decision and financial responsibility. You are also concerned with figuring out exactly how much you can afford. If you’re asking yourself, “How much can I borrow?”, you are in the right place. Read on to be able to confidently tell yourself, “Here are factors of calculating how much I can borrow for a mortgage.”
Gross Monthly Income
Your gross monthly income is a major aspect of how much you can borrow. This is usually salary-based. Lenders look at how much your household brings in each month to get a general understanding of what your finances look like. When calculating how much you can borrow, make sure that you use your monthly income amount prior to taxes and deductions. Pat yourself on the back and tell yourself, “I now know the first factor for calculating how much I can borrow.”
Expenses Per Month
The next factor that must be considered is how much you spend each month. You must factor in how much you will spend on credit card payments. Consider the money you put toward groceries and other necessities each month. Household expenses such as property taxes, PMI, and insurance should also be added to this sum. If you or your spouse is responsible for a car payment, add it to this equation. If you find that you’re expenses are too high, consider utilizing a money counting machine. The sum of your monthly expenses is another factor of calculating how much you can borrow for a mortgage.
Potential Interest Rate
“What else goes into how much I can borrow for a mortgage?” If you’re asking this question, the answer is the interest rate you will potentially earn. The interest rate of a mortgage is how much interest you will be required to pay on your mortgage. These rates are always determined by lenders, which makes them important factors when receiving a loan. Some mortgage rates are fixed (unchangeable) while others are variable. Naturally, variable mortgage interest rates change. Both types of rates fluctuate based on interest rate cycles. Determining what your potential interest rate would be when purchasing a home plays a role in calculating how much you can borrow for a mortgage.
Your debt-to-income ratio will reveal what percentage of your income is needed to pay off your debts. This factor will, therefore, need to be implemented after calculating your gross monthly income and total monthly expenses. Keep in mind that this percentage should not be more than 36%. If it is, look to cost containment strategies to bring your percentage down. Lenders look at this percentage as a deciding factor for how much they will lend you, and if they will accept you for a loan at all. Remind yourself that although this ratio may end up being disappointing, it’s “a factor of how much I can borrow”.
Another significant component of calculating how large of a loan you’ll be able to receive is the down payment required on the house. You will want your down payment to allow you to forego PMI payments. If you have enough money for the down payment, it’s still a good idea to limit your down payment for this reason. Limiting it will also allow you to end up with a better calculation for how much you can borrow for a mortgage.
If you’re considering borrowing money for your mortgage, you must consider multiple factors. The first one is your monthly gross income. How much you spend each month on a variety of expenses is another factor. The interest rate you will potentially end up with is a major element as well. After considering the previous factors, you will need to determine your debt-to-income ratio. Down payment cost is a very significant element, too. Now, you can congratulate yourself by saying, “Here are factors of calculating how much I can borrow for a mortgage.”