How Much Can I Borrow for a Mortgage?

[Apr 10, 2009.]

 

Today’s mortgage rates are at historical lows, delighting many first-time homebuyers. But many real-estate newbies are confused about how much they can borrow for their first mortgage. The following guide can help with the process of applying for a mortgage loan.

What You See Isn’t Necessarily What You Get

It’s fun to visit open houses and dream about the possibilities of homeownership. But first-time homebuyers need to keep in mind that their first home may not have all the features they want. If there’s any lesson to be learned from the housing crisis, it’s for homeowners to live within their means and delay purchases that they can’t afford.

Debt-to-Income Ratio

So the first step in determining how much mortgage loan a person can afford is to look at their debt-to-income ratio. That’s basically the amount of money a person earns compared with the amount they owe to creditors. It’s generally recommended that a person’s total debt-to-income ratio shouldn’t be any higher than 36%, including mortgage expenses. So a homebuyer who makes $4,500 a month, would ideally have total debt payments of no more than $1,620 ($4,500 x .36).

In this example, the person already has $400 of credit card debt. So they should aim to buy a home with total housing costs of no more than $1,220 a month ($1,620 - $ 400), which includes mortgage loan, insurance, taxes, and private mortgage insurance (PMI) if needed.

While some lenders may be willing to loan a bit more to a borrower who has excellent credit, most borrowers should avoid being tempted to bite off too big of a mortgage loan. Furthermore, some first-time homebuyers forget that in addition to a mortgage, there are other housing-related expenses they’ll have to pay such as utilities, trash removal, maintenance, furniture, lawn care, etc.

Mortgage Quotes

The next step is to compare mortgage rates from different lenders. Borrowers can get mortgage quotes in their area here. It’s better to go through the process of finding a mortgage lender and getting pre-approved for a mortgage before beginning a serious house hunt. That way, first-time homebuyers will know exactly how much a mortgage lender is willing to loan to them before hitting the open house circuit. Knowing how much mortgage a homebuyer can afford also helps realtors search for suitable properties.

 

About Author:

Francine L. Huff is a freelance journalist and the author of The 25-Day Money Makeover for Women. She has appeared on a variety of TV and radio shows.