Wondering how much a lender will give you? Instead, ask how big a loan you should get, based on your financial situation. Here is a guide to get started.
Prequalify
By prequalifying you can quickly discover how large a loan you may qualify for, before making any commitment.
Budget
Develop a budget with additional costs of homeownership, including upkeep expenses and other debts. It gives you a realistic idea of what you should borrow without sacrificing future finances.
What Lenders Look For
As lenders review loan applications, they look at 3 key areas.
1. Debt-To-Income
Debt-to-income ratio (DTI) is the total amount of loans, credit cards and debt, with an estimated mortgage payment, that is compared to your pre-tax income. Typically lenders prefer a 36% debt to income ratio. The best ratio also takes future debt into account.
2. Credit Score
Your credit score tells lenders if you paid loans on time and in full. Credit scores range from 300 to 850, and are created by Equifax, TransUnion, and Experian to measure credit history. Your score determines if you qualify for a mortgage loan and what kind of loan you qualify for. Lenders look for at least a score of 620. Higher scores may result in lower down payments or lower interest rates.
3. Your Down Payment
If you pay more cash on a home during the mortgage closing, it may result in smaller monthly payments. Typically 3.5% to 20% of the loan is required, but this varies with different loans. Without 20% down, you probably will pay for private mortgage insurance (PMI), an additional cost on your monthly mortgage payment.
Government Help
FHA and VA insured loans have lower requirements and help individuals with low credit scores, high debt for their income or the inability to make the required down payment.
Compare Lenders
When you have found a comfortably sized monthly payment, contact several lenders to match your payment to current home prices. Asking yourself, Should I Get Pre-Approved? Be sure to get a pre-approval to prove to sellers that you’re ready and check for interest rate changes and different term lengths. Stick to your budget. It’s your plan for success!
