Thursday, February 25, 2010

How much can you borrow for a home mortgage loan?

Borrowers who’re looking for buying a home for the first time frequently ask the question - how much can I borrow for a mortgage? When you have this type of questions, given below are some financial details that you should understand.

Buying a home is an important investment in your life and it needs a lot of money. Most of the time, borrowers don’t have sufficient cash to buy their homes. As a result, they need to go for a loan to fulfill their dream of homeownership. Mortgage lenders come up with a variety of loan products to satisfy various requirements of the potential home buyers.

Now, the crucial question for all homebuyers is “how much can I borrow for a mortgage”.

Rule of thumb on the maximum mortgage amount you can borrow

If you’re single or the sole breadwinner of your family, the maximum mortgage amount that you should borrow is usually 3 to 3.5 times your gross yearly income before deducting taxes.

For instance, if your salary is $35,000 every year, then the maximum loan amount that you can borrow is $105,000.

When you’re borrowing a home loan with a spouse or friend, the maximum amount that you can borrow as a loan is 2.5 times your joint yearly salary before taxes.

For instance, if the joint salary amount is $50,000 per year, then the maximum mortgage that can be borrowed is $125,000.

If you’re a self-employed individual or running a business, then the maximum amount you can borrow is dependent on your business accounts and would possibly be worked out by taking your net income into account.

Loan affordability

Home loan affordability is a tool that the lenders implement to evaluate how much you can borrow. Expenses like credit card payments, livelihood expenses and student loan payments are deducted from your monthly income. The left over amount is your mortgage payment and the rule of thumb is that it shouldn’t be more than 28% of your monthly income. In addition, your overall debt payments (including housing payments) shouldn’t exceed 36% of your monthly income. This formula is expressed in terms of a ratio, which is known as the debt-to-income ratio. Lenders use this ratio to analyze your repayment capacity. Your credit score and down payment also play an important role in how much mortgage you would be offered by the lenders.

Prior to choosing a home loan, you must work out how much loan you can afford. This would help you make a good home buying decision.

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