How Much Can You Borrow for a Mortgage?
- When you buy a house, the mortgage is not the only new payment for which you are responsible. You must also pay for homeowner's insurance and any real estate taxes. Banks add this to your anticipated monthly mortgage expenses.
- PMI stands for private mortgage insurance. If you cannot afford at least 20 percent of the home's price as a down payment, you will likely need to purchase PMI to protect the bank's investment.
- The front-end ratio is the comparison of the monthly mortgage costs -- including insurance, real estate taxes and PMI -- to your total income. Mortgage costs are usually allowed to make up between 26 percent and 29 percent of your income. For example, if you made $3,000 a month and your bank allowed 28 percent, you could have a maximum monthly payment of $840.
- The back-end ratio is the comparison of your total debt payments to your income. This includes credit card debt and college loans, and the total can make up 33 percent to 41 percent of your income. For example, if your bank used 35 percent as the limit, and you have a monthly income of $3,000, your total debt limit per month would be $1,050. If you had to pay $400 a month for student loans, you would thus have a maximum of $650 left for a mortgage payment.
- The better your credit score, the more likely banks will be willing to use the upper limits of the ratios for your limits because you have shown a history of repaying credit on time.