How Much Will I be Able to Borrow for a Mortgage?

The purchase of a home is something to get excited about! However before you start looking at home you should take the time to find out how much you will be able to borrow for a mortgage. You should ask yourself the question- how much can I afford to borrow?

The purchase of a home is something to get excited about! However before you start looking at home you should take the time to find out how much you will be able to borrow for a mortgage. You should ask yourself the question- how much can I afford to borrow?

Many people automatically take out the largest home loan that they are approved for. While this may make it possible for you to purchase your dream home it is important to realize that being approved for a mortgage and being able to afford to pay it on a monthly basis are not the same thing. Eligibility is only the beginning. Read on to learn more.

Ask yourself the question again- How much will I be able to borrow for a mortgage? To answer this question fully it is essential that you be able to understand things from the perspective of the lender. Eligibility for a loan is based on a particular formula. The rule of thumb you should bear in mind is that your monthly home loan payment should not exceed 28 percent of what your gross income is. This takes into consideration more than just the base price of the house you want to buy.

Let us look at a concrete example of this. Let us say that your gross income is $50,000. In order to not go over the 28 percent your mortgage payment would work out to be you would pay $1,166.66 a month (or $14,000 a year) for the home loan. The $1,166.66 must cover all of the essential components of a mortgage which include principal, interest, taxes and insurance. The acronym for this is PITI.

Those who have good credit will be able to borrow more money for a mortgage than those with bad, poor or fair credit. For those with excellent credit histories it is possible that the lender may allow you to take out a mortgage that has a monthly payment that is equal to 30 percent (or in some cases even 40 percent) of your gross monthly income. However you must consider everything from your household budget to your family’s needs to the amount of money you have tucked away in savings or investments before deciding whether or not you want to take on a mortgage that will eat up that large a proportion of your monthly earnings.

While your mortgage eligibility is based on the income you gross, the payments you make on a monthly basis are made from the income you net. This can look quite different. For example the $50,000 you gross on a yearly basis will drop down to a net of $36,000 after the 28 percent is used to pay taxes. When you take $20,000 out of that amount to pay your home loan that leaves you with $16,000 to live on annually.

When you break it down to a monthly basis, you are paying $1,333.33 on your mortgage. Then you must add in other expenses you have including a car payment, utilities, food, credit cards and your children’s educational costs. You may not be left with as much money as you had originally anticipated.

How much you will be able to borrow for a mortgage and how much you can actually afford when you really sit down and think about are both very important distinctions to make. Be very thorough in your planning when it comes to applying for a mortgage. Know what you can afford in advance of applying.