Buying a home is a complicated and exciting process that hinges on many factors. Without a mortgage loan, most individuals can't afford the home they want. This is especially true for first-time home buyers, who must take out mortgages for most of the price of a new home. When you apply for a mortgage, the lender will examine your financial data and perform a series of calculations to determine how much you can borrow.
One of the key factors that determines how much you can borrow for a mortgage is your credit score. Your credit score is a product of your past borrowing history and tells the lender how much of a risk you represent. In some cases, a low credit score may make it impossible to get a mortgage in any amount. If you're married and buy a home with your spouse, each of your credit scores will factor into the amount you can borrow and the interest rate the lender offers.
Income and Debt
Income and debt also play important parts in getting a mortgage. In general, the higher your monthly income, the more you can afford to pay each month toward your mortgage. Any debts that you have count against your income in determining how much you can borrow. Mortgage lenders calculate metrics called front-end and back-end ratios by plugging your annual salary into a mathematical formula. Your front-end ratio, also known as a maximum housing expense ratio, shows how much of your income will go toward paying your mortgage. Limits vary by lender and type of loan, but typically lenders don't want to see more than about 28 percent of your income needed for housing expenses. Your back-end ratio is the maximum debt-to-income ratio that the lender will allow you to have and still get a mortgage. Typically, this ratio should be 36 percent or lower.
Lenders want to make sure that mortgage borrowers can make their monthly payments for the next 15, 20 or 30 years. Besides checking your income, lenders will also examine your savings to determine how much they can loan you. More money in savings means you'll have reserves to draw on if your income falls or fails to grow in the future. More savings also means you can make a larger down payment, reducing the amount that you need to borrow and increasing the amount of equity you have in your home from the beginning.
Mortgage interest rates affect not only your monthly payment, but how much you can borrow in the first place. This is because a higher interest rate means that you'll pay more in interest for a larger overall payment. In short, paying more for the privilege to borrow means you can't afford to borrow as much. Mortgage interest rates depend on economic factors, your lender's policies and your credit risk.