So, you’re ready to start a new chapter in your life and buy a home? Congratulations! Perhaps you’re expecting or your family is growing, and you want a bigger place with a backyard. Or maybe you’ve been saving and are in a good place financially to afford a downpayment. Whatever your reasons, we are excited for you! Homeownership is an incredible experience!
If this is your first time applying for a mortgage, you may be wondering how much you can borrow. Here is what you need to know.
How Do Lenders Determine Your Loan Amount?
Lenders use several factors to determine your maximum loan amount. They look at your monthly expenses as well as your total monthly gross income. They will also review your:
- Credit history and score
- Debt-to-income ratio
- Loan to value ratio
How Much You Can Borrow Vs. What You Can Afford
It is important to understand that there’s a major difference between how much your lender is willing to lend you and how much you should actually borrow. Just because you have been prequalified for a certain amount doesn’t mean you should spend that much. You do not want to overextend yourself. In other words, you want to feel like you can easily afford your mortgage payments along with your other monthly expenses. Therefore, your question should not be, how much can I borrow, but rather, how much house can I afford?
First Time Mortgage: Calculating How Much You Can Afford
There are a variety of strategies you can use to figure out how much you can afford for your first-time mortgage.
Here are a few:
A good rule of thumb to follow is the 28/3 rule. According to this guideline, your total housing costs should not exceed 28% of your gross monthly income. Additionally, your total debt payments should not exceed 36%.
Another way to figure out how much house you can afford is to use a mortgage calculator. An online calculator can help you figure out how much your monthly payments will be, taxes, PMI, and home insurance included.
Spend Less than 30% on Monthly Housing Costs
“House poor” is a term used to describe a situation in which someone cannot afford to pay their mortgage based on the income they have coming in. To avoid being house poor, you should aim to spend less than 30% on your mortgage payments, utilities, and housing costs combined.
We are here to help! Call today to speak to an expert and get advice about your first-time mortgage loan.