If you are in the market to purchase a home, it’s likely that you will need to apply for a mortgage to pay for the property. Lenders consider several factors when determining how much you can borrow.
Mortgage considerations
Lenders will look at how much income you earn each month which may include employment income and bonuses, for example. The lender uses this metric to ensure that you have stable income and can make the monthly mortgage payment.
Depending on your financial situation, the lender may ask you to demonstrate that you have savings in addition to your income.
The lender will also review your debt-to-income ratio and your credit score.
The term “debt-to-income ratio” refers to the total monthly debt payments you owe compared to your gross monthly income.
A higher credit score may help you qualify for a lower interest rate on the mortgage or a larger loan amount.
In addition to the mortgage, you will need to pay property taxes and homeowners’ insurance and these may be factored into the mortgage approval amount.
Deciding how much to borrow
Even though the lender may approve you to borrow a certain amount for the mortgage, it’s important to borrow only what you feel comfortable repaying.
For example, you may want to consider your other monthly expenses like groceries, utilities, other debt payments and transportation costs, in addition to what you would pay monthly for your mortgage. Also, you will likely need money set aside for maintenance costs and unforeseen emergency repairs.
You may have other financial goals like saving for retirement or education that should also factor into how much you borrow for your mortgage.