How does the lender decide the maximum loan amount that I can afford?
The lender considers your debt-to-income ratio, which is a comparison of your gross (pre-tax) income to housing and non-housing debts. Non-housing expenses include such long-term debts as car or student loan payments, alimony, or child support. Typically, mortgage payments should be no more than 29% of gross income, while the mortgage payment, combined with non-housing expenses, should be no more than 41% of income. The lender also considers your cash available for a down payment and closing costs, credit history, and employment history when determining your maximum loan amount.

The lender decides how much you can afford mainly by calculating your debt to income ratio, also commonly referred to as DTI or DR. Your debt to income ratio is calculated by figuring out what your average monthly income is and what your total monthly debts are and then dividing the two numbers. For example you have:
Auto Loan: $300 per month Monthly Income: $3,000
Credit Card 1: $150 per month
Credit Card 2: $100 per month
Total: $550 per month
Therefore, your DTI would currently be: 3000/550 = 18.33%
Thus, if you were able to go up to a total DTI of around 40% then we could now calculate how much of a home you can afford. $3,000 per month income x 40% = $1,200 total monthly expenses
$1,200 (40% ratio of income allowed)- $550 (current monthly debt) = $650 (maximum mortgage payment allowed)
With this figure of $650, we can go back in and plug in a loan amount, an interest rate, and a loan term and be able to calculate how much of a home loan you can afford. Please contact us if you have any questions about any of the information or need further clarification regarding any of the information contained on this page.

As a borrower you must keep in mind that bills like grocery, telephone and various other monthly and dialy expenses are not figured into the DTI ratio. As a borrower you will need to use common sense and restraint when deciding how much you can afford for a monthly mortgage payment.

Lenders can approve you for a much higher payment than you may be able to practically afford. Don't fall into the trap of choosing a home or cashing out more money than you can afford to pay for comfortably. If you do not have substantial money saved for a "rainy day", it may be prudent to choose a mortgage which allows you to make a smaller payment than the maximum which you can afford. In this way, you can make the maximum payment when you can afford it, but can drop down to a lower payment when necessary to prevent a short term cash crunch from impacting your credit.

 

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