How Do Mortgage Lenders Decide How Much You Can Borrow
When you visit your lender to get a mortgage for your Louisville home, they will tell you the maximum amount that you are allowed to borrow. But, how do they reach this total and what factors do they take into consideration?
How do they determine that one borrower can take on a bigger mortgage than the next?
This decision is made by mortgage companies by considering a wide range of factors, including your credit information, your salary, and much more.
Here are some of the common ways that lenders determine how much you can borrow:
1. Percentage of Gross Monthly Income
Many lenders follow the rule that your monthly mortgage payments should never exceed 25% of your gross monthly income.
This will ensure that you are not stretched too far with your mortgage payments and you will be more likely to be able to pay them off. Remember, your gross monthly income is the total amount of money that you have been paid, before deductions from Social Security, taxes, savings plans, child support, etc.
2. Debt to Income Ratio
Another formula that mortgage lenders us is the "Debt to Income" ratio, which refers to the percentage of your gross monthly income that is taken up by debts. This takes into account any other debts, such as credit cards and loans. May lenders say that the total of your debts shouldn't exceed 36% of your gross monthly income.
The lender will look at all the different types of debt you have and how well you have paid your bills over the years.
By using on of these formulas, your mortgage lender calculates the size of the mortgage that you can afford.
Of course, there are many other factors that need to be considered, such as the term length of the loan, the size of your down payment and the interest rate.
Remember that when factoring in your income, you usually have to have a stable job for at least two years in a row to be able to count your income.
If you want to increase your chances, you could consider paying down your debts or buying with a co-borrower, which will improve your debt to income ratio.