How Much Mortgage Can I Borrow?

By Sari R. Updated on 7/19/2017

Save yourself time and stress by asking yourself: How much can I borrow? Answering this question will ensure that you're looking at the right home price range. Mortgage calculators, such as the ones you'll find here, are extremely helpful in estimating how much you can borrow.

Three primary factors that ultimately decide how much you can borrow are:

1. Monthly income before taxes.
2. Long-term debts.
3. The amount of cash on hand for down payment and closing costs.

The general rule is that housing expenses should not exceed 25% to 28% of your gross monthly income. Housing expenses are defined as monthly mortgage payments with principal and interest, homeowner’s insurance, and property taxes.

For FHA Loans, your housing expenses must not exceed 29% of your gross monthly income. 

American Housing Survey data state that the median annual taxes per $1,000 value is about $12 and the median property insurance monthly is about $30. You can use these averages as a rough estimate when calculating your home expenses. 

Income

While employment is your main source of income, you can also add:

• Overtime, bonuses, and commissions.
• Income from self-employment.
• Income from savings, trusts, partnerships, etc.
• Social security benefits, veteran's benefits, or retirement.
• Alimony, child support, or public assistance programs.
• Workmans's comp or permanent disability payments.
• Rental income from properties

Long-Term Debt

Your regular monthly obligations are also considered, such as those from other real estate loans, revolving accounts, installment loans (bank loans, car loans, school loans, etc), alimony and/or child support obligations. 

Try to pay off as much debt as possible, long and short term, before you apply for a mortgage.

Knowing how much you can afford in monthly mortgage payments will benefit in determining the maximum loan amount you can borrow. Using our mortgage calculators can help estimate the maximum and most comfortable mortgage amount for you.

By having an idea of what monthly mortgage payments you can afford, you can decide which is the right mortgage option is right for you, such as a 30-year fixed rate or a 5/1 adjustable rate mortgage.

Down Payment

When you apply for a mortgage, it's expected that you'll have enough money on hand for the down payment. This amount is typically calculated as 20 percent of the asking price plus closing costs--which is about 3 to 6 percent of the loan amount. 

Savings, stocks and bonds, mutual funds, employee savings plans, or Individual Retirement Accounts are sources to consider for coming up with your down payment. You can also use financial gifts from parents or relatives. Even grants from a nonprofit housing assistance programs can be used for a part of your down payment.

If you have less than the 20%, you will likely need to obtain private mortgage insurance (PMI). PMI enables you to qualify for a mortgage loan with a down payment as low as 5 percent. You may also want to consider an FHA loan, which can have a down payment requirement as low as 3 percent. FHA loans sometimes also permit closing costs to be included in the mortgage loan amount.

Calculate your mortgage amount, and you'll not only know how much you can borrow, but you'll also be another step closer to the home of your dreams.