How Much Money I Can Borrow to Buy a House?

by HomeLoan.com
Lenders base the amount of money you can borrow to buy a house on your ability to repay the mortgage. The bank funding the mortgage looks at your income, credit history and long-term debts like credit cards and loans to determine the maximum monthly payment you can afford. The amount of money in your savings, retirement accounts and stock portfolio, which determines a possible down payment, also factors into the equation. Different lenders looking at the exact same information may offer vastly different total amounts based on the types of loan programs they offer and the current interest rates.

Loan Limits

Depending on the state you live in, the maximum amounts of certain loan programs differ. The federal government adjusts these limits annually based on the median home price of a neighborhood. Generally, a conventional or conforming loan falls below $417,000 for a single-family home and offers the best interest rate. Depending on your area, you may qualify for a high-cost conforming loan, which allows you to borrow more without incurring higher interest rates. Loans backed by the Federal Housing Authority (FHA) allow for a smaller down payment and are less lenient when it comes to credit scores. FHAs differ by area. To buy a house beyond the limit of loans, a second mortgage is sometimes taken out to cover the difference. For more expensive houses, a non-conforming jumbo loan may be needed, which usually comes with a higher interest rate.

Income

Your monthly housing expenses should not exceed 25 to 28 percent of your gross monthly income. For FHA loans, housing costs cannot exceed 29 percent of your income. Housing expenses include property taxes and hazard (homeowner's) insurance. The easiest way to qualify for a loan is using past W-2s and current payment stubs to prove income. Overtime, bonuses and commissions are averaged over a 2-year period. Other income, such as interest or dividend income, alimony, disability payments or certain benefits may also be applied if needed. Income from self-employment is often harder to prove, but can be used with proper documentation.

Debt

For conventional loans, total monthly debt, including housing expenses, may not exceed 36 percent of your gross monthly income. On FHA loans, the debt-to-income ratio jumps to 43 percent. These numbers are quite fluid, depending on the type of debt and credit score. Exceeding maximum debt-to-income ratios pushes a loan into manual underwriting, where a more thorough look is taken at your overall picture of creditworthiness.

Credit Scores

In general, the better your credit score is, the lower the interest rate on a home loan will be. A lower interest rate means you can qualify for a larger mortgage. FHA loans do not base interest rates on credit score, but each lender has a minimum score they will accept based on Fannie Mae's accepted scores. Credit scores are just a snapshot of a person's creditworthiness, so overall debt is also taken into account during the approval process.

Down Payment

How much money you have saved for a down payment helps determine how much you can borrow. Some loans require a larger down payment, while others allow a smaller upfront cash payment, but require mortgage insurance, which can add a few hundred dollars a month to your mortgage payment. In general, the best loan to house value (LTV) for a new mortgage is 80 percent, which means a 20 percent down payment is needed. Some loan programs allow you to drop to 10 percent without incurring mortgage insurance, but this is partially determined by your credit score and the amount of the loan. FHA loans allow a much smaller down payment of around 5 percent, but require mortgage insurance. If you do not have the cash for a down payment, many assistance programs exist to help first-time and low-income buyers purchase a home.

Considerations

Don't be house poor! While your loan officer or broker may suggest that you qualify for a huge mortgage, you should take into account your reality. How much do you spend on entertainment each month? Do you want to travel? Is your spouse's job in jeopardy? Do you not have an emergency fund? Base the total amount you can afford each month on what makes you comfortable and allows you to live without struggling. Don't spend your entire salary on your house each month just because you qualified for the mortgage.


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