How much mortgage can I afford?

How much mortgage you can afford depends on several factors like your income and expenses, your credit score, and the housing market itself.  

Factors that impact your mortgage borrowing limit 

There are a few primary factors that lenders consider to calculate your loan amount: 

1. 1. Debt-to-income (DTI) ratio: This is the ratio of your total debt (including student loans, insurance, auto loans, and/or mortgage) to your total pre-tax income. A lower DTI generally means greater chances of mortgage approval for the amount you wish to borrow. Generally, home-related expenses should not exceed 28% of your monthly income and total debt should not exceed 36% of your total income.

• Down payment: You generally need to pay a percentage of the home value as a down payment before taking out a loan. Your down payment can come from your savings, investments, or even gifts from family. How much money you can put in as a down payment can influence how much mortgage you qualify for. Making a larger down payment lowers your monthly mortgage, can help avoid private mortgage insurance (a requirement for people who put down less than 20% for their home), and can shorten the loan term. 

• Credit score: Lenders use credit scores to assess how likely you are to repay your loan on time, to decide how much they’ll lend you, and what interest rates to charge. Your credit score provides a snapshot of your overall credit history and includes details on your payment history, credit utilization ratio, the diversity of your credit accounts, how often you apply for credit, and the length of your credit history. The higher your credit score, the better your chances of getting a lower interest rate for a higher loan amount. 

Mortgage type: Some mortgage types, especially those backed by government departments like the U.S. Department of Agriculture (USDA) and the U.S. Department of Veteran Affairs (VA) offer lower down payment options or do not require a down payment at all if you qualify. With Federal Housing Administration (FHA) loans, you can pay a smaller percentage of down payment (as low as 3.5%).