How Much Mortgage Do I Qualify For?

How Much Mortgage Do I Qualify For?

A mortgage is a loan used to purchase real estate. It is based on a borrower’s income, debt, down payment and projected housing costs such as property taxes and insurance.

Lenders verify the borrower’s income through review of paystubs, W-2s and federal income tax returns. They also check a borrower’s credit and debt-to-income ratio.

Interest Rates

Mortgage rates are influenced by a number of factors, including the type of loan you choose, your credit score and your debt-to-income ratio. A lower debt-to-income ratio means you are less of a risk to the lender, so you may qualify for a larger loan amount. You can also reduce your mortgage interest rate by paying discount points at closing, which cost 1% of the total loan amount.

While there are a few things you can’t control, like market conditions and borrower qualification criteria, you can improve your odds of getting the best mortgage rate by improving your credit score and saving for a substantial down payment.

It’s also a good idea to compare rates on several lenders’ websites before you apply, since rates can change from day to day. You can see sample rates and their associated APRs on Page 3 of your official Loan Estimate. Also, don’t apply for a loan until you have been preapproved by the lender.

Down Payment

Your mortgage lender will require that you pay a percentage of the purchase price upfront, typically between 3 and 20 percent of the home’s sales price. This amount, combined with the loan amount you receive to buy the house, is known as your “loan-to-value ratio.”

Generally, lenders expect borrowers to put down a minimum of 20 percent, although there are exceptions for first-time buyers and loans backed by the Federal Housing Administration, Fannie Mae or the Department of Veterans Affairs.

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Whether or not you make a large down payment is an important decision that should be based on your budget, financial goals and resources. However, putting down more upfront has some advantages: No PMI payments, which can reduce your monthly costs; and possibly a lower interest rate, which can save you money over the long term. You can use an affordability calculator to get an estimate and discuss your options with a trusted mortgage professional.

Debt-to-Income Ratio

Your debt-to-income ratio is one of the most important factors that lenders look at when deciding whether or not to approve you for a mortgage. The DTI measures how much of your pre-tax income goes toward all debt payments, including your new mortgage loan’s principal and interest payment plus property taxes and homeowners insurance.

To calculate your DTI, add up all your monthly debt payments, such as credit card debt, auto loans and student debt, and then divide that amount by your gross monthly income (before taxes). You should also include any recurring income that you receive each month, such as child support or alimony, but leave out other monthly expenses like groceries or utilities.

Typically, lenders will want your DTI to be less than 36%, although this can vary depending on the lender. You can improve your chances of getting a mortgage by paying down debt and making sure not to take on any additional credit before you apply.

Credit Score

Generally speaking, the higher your credit score, the better the mortgage rates you’ll qualify for. However, each lender sets its own requirements, so you’ll need to talk with a home loan expert to determine what your specific situation is.

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A couple of other factors lenders consider are your income and your debt-to-income ratio. Ideally, lenders want to see that your monthly debt payments (including your estimated new mortgage payment) don’t exceed 43% of your gross monthly income.

While there is no one-size-fits-all minimum credit score that will guarantee a mortgage, the best credit scores fall into what’s known as the excellent credit range. Borrowers with those types of scores likely have no missed payments in the past seven years and a credit utilization ratio that’s less than 30%.

To boost your credit, be sure to check your free annual credit reports, which are available from each of the three national credit bureaus. If you find errors, contact the credit reporting agency and correct them.