How Much House Can I Afford?

Borrowing money from the bank is not as easy as you may think. You cannot simply walk in, request a mortgage amount, and get it unless you have made sure you earn enough to borrow that amount from the lender. Yet the ability to get the right loan amount at the right price is crucial to getting the home you want. How much can you afford to borrow? How much of a mortgage can you take on? What you may not realize is that you can find this out before you even begin talking to a lender.

How Lenders Decide What You Can Afford

Lenders use many factors to determine how much you can afford to borrow. Unfortunately, it is based less on how well you think you can handle the funds and more on the facts of your financial situation. Your lender takes a good amount of facts and uses them to rate you as a risk, and your level of risk determines how low your interest rate is. In other words, lenders use the interest rate to define how much risk they are taking on.

A key way they analyze risk is your credit score. The higher your credit score, the lower your risk: you have been a responsible borrower, you have enough history with lending, and you are likely to continue these good habits on the loan they provide. A high credit score means you are less likely to default, so the lender can offer you a lower rate of interest because you are a more secure borrower. On the flip side, when you do not have great credit, lenders face more risk and therefore increase the cost of lending to you. Now they charge a higher rate of interest, and you pay more for borrowing money from them.

How Much Can You Borrow?

Credit is not all that is considered when getting a loan, though. Once your interest rate qualifications are considered and set, the lender needs to decide how much to lend you. What else goes into that decision? With your interest rate determined, they can work out how much of a monthly payment you can afford to pay. They will likely determine how much debt you currently have and how much of it must be repaid monthly. This helps establish how much of your monthly income is left to repay the new loan.

You can use a mortgage calculator to get the specifics for the loan you are likely to obtain. This gives you a good estimate of how much of a loan you qualify for before talking to lenders. Here are a few examples to help you see what goes into repaying your mortgage loan.

Let's say you are likely to get an interest rate of about 6 percent. You would like a term of 30 years to repay your loan, which is a typical mortgage loan term. You can choose other options, from as short as 7 years to as long as 40 years. Here is how this would work out using a mortgage calculator:

Several things can be determined from this information. First, based on your annual income, lenders determine how much money you have on a monthly basis to make payments with. Each lender has a maximum percentage they are willing to lend to, so you must make a certain amount of money per month to qualify for a loan. Yet it does not stop there.

Your monthly debt obligations are considered as well. The goal here is to determine how much of the income you bring in is already going out to other debts such as car loans, student loans, personal loans, cell phones, and other obligations you pay each month. Do not forget that a certain percentage is also put aside for estimated costs of things like food, utilities, and, as noted in the example, homeowners insurance and taxes that you will need to pay but may not be paying right now.

When you use a mortgage calculator designed to take your information and give you answers, you can see exactly where you stand and what the future holds. In the example above, you qualify for a loan that is considerable. If you only made $80,000, you would qualify for a home mortgage no larger than $168,700, using the same factors for everything else. And if you were lucky enough to lower your monthly debt obligations to just $250, with all other factors the same as the example above, you would qualify for much more, up to a $316,420 loan.

When it comes to learning this information, use a mortgage calculator to help you. Change the terms, interest rates, and other factors to match the type of loan you are looking for as well as your current financial situation. When you do, you can find the most affordable loan for your needs, and you will know what is coming before you start looking!