If you're wondering, "How much money could I borrow to buy a house?" you should keep in mind that while there are dozens of ratios that lenders use to determine how much money a mortgage applicant is eligible for, you need to first figure out how much you are comfortable with owing every month.
Every mortgage lender has a certain acceptable debt-to-income ratio that must be met before a mortgage application can be approved. This ratio is in addition to other eligibility guidelines set by the lender including minimum credit score, down payment requirements, and any other requirements set by the lender. Mortgage applications are not generally approved based solely on the amount of money you can afford to pay each month, although this factor is certainly a large consideration.
What is a debt-to-income ratio? This is the amount of money you owe to creditors versus the amount of your income. Mortgage lenders usually examine an applicant's monthly debt-to-income ratio, taking into consideration a few different things:
Income: How much money do you make every month? Is your income consistent, or does it fluctuate? Do you have other sources of income including interest income, annuities, or court-ordered child support payments? Second jobs may or may not be considered based on how long the applicant has been working the second job.
Debt: Many mortgage lenders will not take certain installment loans into consideration if the loan balance is so low that it will be paid off completely within a couple of months. Debts that will be included within the ratio include credit card payments, auto loans, signature loans, and any other mortgages that will not be paid off with the purchase of the new home.
A debt to income ratio that is higher than 36 percent may stop a lender from approving a mortgage application unless the application features a guarantor like the Federal Housing Administration (FHA) or Department of Veterans Affairs (VA).
How Much Money Could I Borrow to Buy a House with a Guaranteeing Agency
If you are eligible for a mortgage guarantee from the FHA or VA you may be able to find a mortgage despite a higher debt-to-income ratio. Keep in mind that your credit score will also come into play when trying to figure out "How much money could I borrow to buy a house?" Also, remember that a loan guarantee from one of these agencies does not guarantee a loan approval from a lender.
Just because a mortgage lender approves you for a certain amount of money, it does not necessarily mean that you will be able to comfortably afford the monthly payments. Instead of taking the full amount and assuming that you will have no problem handling the monthly mortgage, take a look at your own budget and figure out how much money you know that you can comfortably afford while taking other expenses into consideration.
- Can you manage all of your monthly debt?
- Can you pay all of your utilities, making extra room for fluctuations like heat in the winter and air conditioning in the summer?
- Can you afford to put money aside for necessary repairs while still putting money into a savings account?
Stretching your monthly budget incredible thin in order to afford a mortgage payment can be a serious financial mistake. You need to make sure that you have money left over every month for savings and other expenses. Remember: when you own a home you're responsible for repairs and upkeep, and with a limited budget it may prove difficult to manage all of your financial obligations.