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Key Factors That Impact How Much You Can Borrow

One of the first questions asked by prospective home buyers is, “What factors impact the amount I can borrow?”  The first thing to recognize is that everyone’s financial situation is different, and it is important to understand what you can comfortably afford to borrow before you begin your home search.

Lenders consider many factors in determining the amount you qualify for; but in general, the loan amount you can afford will depend on three important factors:

Your debt-to-income ratio (DTI) – Your DTI ratio plays a major role in helping a lender decide whether you’re ready and able to qualify for a mortgage, and helps them determine how much you can afford to borrow.  DTI is the percentage of your income that goes toward paying your monthly debts.  It is calculated by dividing your monthly debt obligations by your gross monthly income.  DTI typically excludes monthly expenses such as food, utility costs and health insurance.

Your loan-to-value ratio (LTV) – Your LTV ratio is a function of the amount of money you put down. LTV is a financial term used by lenders to describe your loan amount as a percentage of the purchase price OR the appraised value of the property.  To calculate your LTV, lenders divide your loan amount by the lesser of the purchase price or the home’s appraised value.  You can also think of your LTV as the inverse of your down payment.  If you put 10% down, your LTV will be 90%.  Your LTV may be slightly higher if costs such as upfront mortgage insurance or other funding fees are added to your loan amount.

Your credit score & history Your credit score, combined with your credit history, is one of the key factors that can affect the interest rate you are offered, the loan amount you are offered, and whether or not a lender will approve your loan application.  Your credit score is a way of measuring how likely you are to repay your loan.  Typically, the higher your credit score, the lower the interest rate you’ll be offered by your lender.