How do lenders decide how much you can borrow for a mortgage?

When you take out a mortgage loan for buying a house, the monthly payments comprise a considerable portion of your overall monthly financial obligations. Most borrowers often ask the question “how much can I borrow for a mortgage” to themselves. Knowing this is absolutely important since the recent housing market dilemma has forced many lenders to make the lending guidelines tighter. Means here you need to research that what is the actual condition of the mortgage market. Here another important thing you need to know that is refinance mortgage interest rates. If in future it is required then your knowledge will help you.

While lenders decide how much they should offer you as a loan, they take into consideration factors like your debt-to-income ratio and the amount of down payment you can make.

The answer to the frequently asked question “how much can I borrow for a mortgage” varies from one borrower to another. Your housing payments are an important expense in your budget. For majority of borrowers, the monthly mortgage payment is their biggest expense till the time their loan is fully paid off. When you question a financial advisor how much you can borrow for a loan, the first thing he will ask is “how much do you make each month?”

The question that will immediately follow is “what other financial obligations do you have?”



Your monthly payments on credit cards, auto loan and personal loan can consume the money that you’d have otherwise utilized to repay your home loan. When you’re looking for the answer to the question “how much can I borrow for a mortgage”, it essentially means how much extra you can borrow over your existing debts.

Last but not least, a lender would be keen to know about the amount of down payment you’re able to make.

Your debt-to-income ratio

When you can work out how much you make each month, it’s simpler for you to answer the question how much you should borrow. The rule of thumb is that your mortgage payments shouldn’t be more than 28% of your gross monthly income and it’s otherwise expressed through a formula known as the front end ratio. If you can maintain the monthly payments of a loan under 28% of your gross monthly income, it’s sensible to go ahead with that loan. Since you can’t regulate the interest rate, you can do this by modifying the loan amount.

The guideline for the back-end ratio is that your total debt payments shouldn’t surmount 36% of your gross monthly income. If they do, then lenders become suspicious about your repayment ability and hesitate to offer a loan to you.

Your down payment

While looking for a home loan, it is recommended that you save enough money for a down payment of 20% or more if possible. If you make a down payment of less than 20%, then you would be asked to buy private mortgage insurance. Lenders would be reluctant to offer you a big loan amount if you can’t make a good down payment. The simple reason is that making a hefty down payment can lower your interest rate and monthly payments and it becomes easier for you to pay off the loan. Lenders take into account the amount of your down payment similarly as how much you earn to decide the amount they should lend you.

Understanding how much you can borrow for a loan before applying for a loan helps you prevent unforeseen financial dilemma in the future.