Lenders use a formula called a debt-to-income ratio to determine the loan amount for which you may qualify. This ensures that your total monthly debt doesn’t take up too much of your income, and you remain inside your financial comfort zone after you buy a home.
Typically, a debt-to-income ratio compares your anticipated monthly housing payment to your gross (pretaxed) monthly earnings and your monthly debt (your credit card and any other loan payments, plus your mortgage payment).
For example, it used to be that most loan programs required a 28/36 debt-to- income ratio, which meant you could devote up to 28% of your gross monthly income to housing expenses, while your monthly housing expenses plus your monthly debt combined could be as high as 36%.
Many of today’s loan programs offer expanded guidelines that allow you to devote more of your gross monthly income to your combined monthly debt. And with the increased use of credit scoring and automated underwriting, many home loan applicants benefit from more flexible debt-to-income guidelines that allow them to be approved for higher loan amounts.
My Mortgage specialist can help you get a better idea of the maximum mortgage amount you can afford. Once you have this maximum figure, it’s up to you to decide if this is the right amount for you, or if you would feel more comfortable with a smaller mortgage and a lower monthly payment.