There’s a lot of mortgage calculators out there—these aren’t honestly all that valuable if you really want to know how much house you can afford. We built a different kind of calculator that tries to answer the question “how much house can I afford” more accurately, but the reality is that the pre approval process is the only way to get a real answer to the question. Ours is free, won’t impact your credit score at all (we only do a soft pull), and it only takes 15 minutes, so there’s no harm finding out what you qualify for and talking with a loan officer about the nitty gritty if you have questions.
But, if you want to know how all this math works behind the scenes, we’ve got you covered. The amount you can borrow for a mortgage depends on several things.
- Your financials—your credit score, income, debt-to-income ratio, and the money you have saved up for a down payment (note you’ll need to have another 3% or so to cover the closing costs).
- Your location and interest rate—where there’s different federal limits on the type of loans you can qualify for, based on the specific location of the home you want to buy
- Your property need—whether it’s an investment property, a second home, or a private residence
- Your type of property—is it a condo or a single family home, or a multi-family home, since these kinds of properties have different costs associated
- Your loan type—for example, if you are eligible for an FHA loan or conventional loan, or if you’re a service member or a family member of someone who served in the military, you might qualify for a VA loan
- Your loan duration—if you’re looking to pay off the property in 15 or 30 years, usually, but there’s a lot of ways to split loans into a 5-, 15-, or 20-year loan term too.
The lender will take all this information and figure out two really critical things:
- What interest rate they can charge—interest rates go up and down, but at Tomo we offer significantly lower interest rates than the rest of the mortgage industry (9/10 buyers can save, with median savings of over $5,200). You can see today’s rates here.
- How much money they can reasonably loan you, factoring in the amount you’d be able to pay each month in mortgage payments.
Now, most lenders will calculate the highest amount of money you could borrow and reasonably pay back—but don’t use this as the single best answer to the question of how much house you should buy. Think about your overall financial situation, how much money you’d want to spend vs. save, as well as the things you might need or want further down the line. Buying a more expensive home does have some financial benefits—it will generally grow in value higher, so you have more total money in the end—but only if you’re confident you can make the payments for a really long time (at least the next 8 years, which is how long people typically keep a mortgage before they move or refinance).
How important is my credit score in figuring out how much I can borrow?
Let’s paint a picture. Using our affordability calculator, iIf you’re pulling in $150,000 a year, have $15,000 set aside for a down payment, and your monthly debts are around $300, you’re looking at a monthly mortgage payment of roughly $3,755.55 for a $473,000 home in Austin, Texas. This breaks down to $2,503 for principal and interest, $789 for property taxes, $158 for homeowners insurance, and $306 for mortgage insurance. No matter if your credit score is 760-779, 700-719, or 660-679, your payment stays the same. Sure, a lower credit score might nudge up your APR a bit, but the actual difference in your monthly bill is pretty negligible. So, while a higher credit score might snag you better terms, it doesn’t drastically alter your monthly costs.
So, while people can get pretty worried about how good their credit is, it’s actually more important that you focus on having qualifying credit—more than 580 in most scenarios—so that you can get a loan in the first place. The jump in interest rates are pretty minor in the long run, and way more dependent on changes in the market.
You can see some of our mortgage rate predictions here.
How does my income influence my mortgage loan amount?
Your income plays a significant(if not the most important) role in determining your mortgage loan amount. Lenders use your gross income—that’s how much you make before taxes and deductions, like your annual salary—to assess your ability to repay the loan. For example, if you have a stable and high income, you will most likely qualify for a larger loan. Lenders typically use a formula that compares your monthly income to your monthly debt payments to ensure you can handle the mortgage (the debt-to-income ratio). It’s essential to provide accurate income documentation and consider how any changes in your financial situation could impact your borrowing power.
Sure with the house you will have additional payments ie maintenance, but the payoff as well as security and stability gained from homeownership far outweighs this in our eyes.
What is the debt-to-income ratio and how does It affect my mortgage?
Lenders use the debt-to-income (DTI) ratio to gauge how manageable your mortgage will be and to ensure you won’t risk defaulting. This ratio, which is calculated by dividing your total monthly debt payments by your gross monthly income, helps lenders assess your ability to handle a new mortgage without jeopardizing your financial future.
For conventional loans, a DTI ratio of 36% or lower is typically preferred. The lower your DTI, the better your chances of securing a larger loan and more favorable terms. On the other hand, FHA loans are generally more lenient, accepting a DTI ratio up to 50%. However, even with FHA loans, maintaining a lower ratio is advantageous as it reflects a more manageable debt load and reduces the risk of default.
Ultimately, lenders want to ensure that your mortgage fits comfortably within your budget and won’t threaten your long-term financial stability.
How does my down payment affect the amount I can borrow?
The size of your down payment has a major impact on both your borrowing potential and the overall cost of your mortgage. A larger down payment reduces the amount you need to finance, which can lead to better loan terms and potentially a higher borrowing limit. For instance, with a 20% down payment on a $400,000 home, you’re borrowing $320,000. If you put down just 10%, you’d need to borrow $360,000.
A significant down payment not only reduces the loan amount but also decreases the total interest you’ll pay over the life of the loan. Plus, putting down at least 20% on a conventional loan helps you avoid private mortgage insurance (PMI), which can further lower your monthly payments and overall loan cost.
That being said, PMI is a very typical part of the home buying game. Consider that the average down payment for first time home buyers is 6-8% and for repeat buyers it’s still under 20% at 19%, meaning the majority of homeowners do pay PMI. So don’t sweat it.
Are there other factors that affect my mortgage borrowing limit?
Yes. There’s no one-size-fits-all answer to this kind of question. While there’s a lot of lenders that put you into a calculator and spit out an answer, we try to work with everyone to figure out the best way to get them a home loan. Sometimes the best move is to buy ASAP—get a starter home and get on the wealth building ladder—and other times it’s better to pay off some debt so that you can get into the place you really love. Your financial situation is unique and very personal, so our goal is to look beyond just your credit score, income, DTI ratio, and dive deeper into your financial picture. We give people credit for their side-hustles and gig work, for example, which a lot of other lenders might ignore.
For example, we recently had a customer whose loan application had been denied by multiple lenders. When he came to us, our underwriters took the time to sit down with him and discuss his situation in detail. While his documents showed a loss of income for the year to date, this was due to recent investments in opening a new location for his business, including significant expenses for new equipment. By engaging in a personal conversation and thoroughly understanding his unique circumstances, we were able to see past the surface-level data.
This personalized approach allowed us to approve his loan with a higher-than-expected amount, recognizing the potential for his business to recover and grow. It was a case where the numbers alone didn’t tell the full story, but our commitment to a detailed and empathetic evaluation made all the difference.
Beyond traditional factors like credit score and DTI ratio, we also consider your employment history, savings, and current debts. A stable job history and substantial savings can enhance your borrowing power, while high levels of existing debt might limit it. By evaluating these factors holistically, we ensure you understand your true borrowing capacity and make well-informed decisions.
Have a good conversation with a loan officer about all this, and figure out what you can really afford to borrow.
If you’re ready to start your journey to homeownership, get pre approved with Tomo Mortgage today.
