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How Much Should I Borrow for a home loanMost of us, while looking for a house, don’t look into factors and variables which are to be thought about in order to be able to purchase a house. Instead, we tend to fall in love with a particular house without knowing if we can afford it or not. Therefore, before you start searching for a house for yourself, you need to have an idea as to how much you can afford. It can save a lot of time, and reduce your trouble if you are certain of the amount you can afford, and help you look out for a house in that price range. There are three main factors which are to be considered in order to know how much you can spend on a new home. They are:
- Your monthly income (before taxes)
- Long-term debts
- Cash you can accumulate for down payment and the closing cost
How much you should borrow depends on what the interest rates are at that given time. In case the interest rates are 8% for a 30 year fixed rate loan, and you have to make 20% down payment in cash, with few or no debts, then several lenders will allow you to purchase a home which is three times your family’s annual income. The conventional lenders allow a person to spend up to 28% of their gross monthly income (GMI) on their mortgage, taxes and insurance, and up to 36 % of gross monthly income on their total debt, including school loans, auto loans, and credit card debt. If there is no debt for a person, then a lender would allow them to spend up to 36% of their GMI on their mortgage insurance and taxes.
The amount that you can borrow, which is sometimes referred to as “borrowing capacity”, depends on your current income and expenditure. Using this information, the lender determines the maximum amount which they can allow you to pay towards your home loan every month, and then they will calculate the corresponding maximum loan amount. The maximum amount that you can borrow differs from lender to lender, and is dependent on individual lender’s lending criteria.
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