How much can I borrow for a mortgage? This is a common question that majority of the borrowers ask when they are contemplating taking out a mortgage loan. There are times borrowers in an attempt to achieve their American Dream faster take out a mortgage that is more than they can afford. This is one of the reasons that sparked off subrpime mortgage crisis. In fact mortgage brokers, lenders and many other mortgage market participants are held responsible for disturbing the stability of the mortgage market.
Although many borrowers who didn’t qualify for a mortgage were given one but it was a matter of few months that they could keep up with their mortgage payments. Soon they started defaulting on their payments and eventually lost their homes in foreclosure. Likewise there were innumerable subprime borrowers who “forcefully” qualified for prime loans. This was done by manipulating income levels, inflating appraisal values etc.
There are few factors that will answer your query “how much can I borrow for a mortgage”, but the main factor is your income and how much you are already paying every month to meet your financial obligations. To sum it up, the following factors affect your eligibility of taking out a mortgage –
DTI or Debt-to-Income ratio
Your debt-to-income ratio must be favorable enough for you to qualify for a mortgage.
Down payment and PMI
You are required to make down payment of 20% of the property value. If you are unable to do so, you have to buy private mortgage insurance or PMI to assure the mortgage lender that his investment is secured.
Total cost of mortgage
When you take out a mortgage, you also need to pay homeowners’ insurance as well as taxes that the mortgage lender will roll into your monthly mortgage payments.
Credit score
Your credit score is an important factor that affects the size of the mortgage that you can take out. Earlier mortgage lenders agreed to give you a mortgage if your credit score was 620. However, these days, getting a mortgage as per favorable terms isn’t possible unless you have a credit score of 730. If your credit is ruined, you may get a mortgage but the rate of interest will be sky high as mortgage lenders don’t want to repeat the same mistake that led to mortgage crisis a couple of months back, the aftermath of which is still alive. Lending norms have become rigid these days.
Be honest to yourself
Since you have witnessed the irregularities that triggered subprime mortgage crisis it is better not to follow footsteps of borrowers who had to lose their homes because of greed. Instead be honest to yourself and to your lender so that even if you qualify for a smaller mortgage, you know the house will remain and you don’t face a threat of losing your house in foreclosure and your question “how much can I borrow for a mortgage” will be justifiably answered.
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