How Much Can I Actually Afford to Borrow for a Home?When you’re thinking about buying a home, it’s important to figure out how much you can afford to borrow. You might have a price range in mind, but lenders use specific numbers to decide how much they can lend you. And you want to make sure you’re borrowing an amount that feels comfortable for your budget!Here’s a simple guide to how lenders calculate your borrowing limit and some helpful tips for finding a loan amount that works for you.How Do Lenders Decide How Much You Can Borrow?
Lenders look at three main things when deciding how much they’ll lend you: your income, your debts, and your credit score. Let’s break down how each one works.1. Your Income
Your income is one of the biggest factors in deciding how much you can borrow. This includes money you earn from your job, plus any other income sources like bonuses or freelance work. Lenders usually look at your “gross income,” which is the money you make before taxes.2. Your Debts
Lenders want to know how much you already owe. They’ll look at any monthly payments you make on debts, like credit cards, car loans, or student loans. This helps them calculate your debt-to-income ratio (DTI)—a big part of figuring out what you can afford.What is Debt-to-Income Ratio (DTI)?
Your DTI is a percentage that shows how much of your income goes to paying debts each month. For example, if you make $4,000 per month and pay $1,000 on debts, your DTI is 25%. Most lenders prefer a DTI under 36%, meaning that no more than 36% of your monthly income is used for debt payments, including your future mortgage.3. Your Credit Score
Your credit score is a number that shows how good you are at paying back borrowed money. A higher score makes you look like a reliable borrower, which can help you qualify for a bigger loan with a lower interest rate. This can make your monthly payments more affordable.Lenders use your credit score to decide not just how much to lend, but also what interest rate to offer. A lower interest rate can save you a lot of money over time, so having a good credit score can help you afford more.How to Find a Comfortable Loan Amount
While lenders focus on numbers, it’s also essential to think about your own comfort level. Here are some tips to make sure you’re not overextending yourself financially:1. Use the 28/36 Rule
A common rule of thumb for home buying is the 28/36 rule:28% of your gross monthly income should go to housing costs (like your mortgage, property taxes, and insurance).
36% or less of your gross monthly income should go to total debt, including your new mortgage payment plus any other debt payments.
2. Consider Your Lifestyle and Savings
Owning a home comes with extra costs, like maintenance and utilities, so it’s good to leave a little extra room in your budget. Think about how much you want to keep for things like travel, hobbies, and saving for emergencies.3. Try a Mortgage Calculator
Online mortgage calculators are helpful tools to estimate your monthly payments and compare loan amounts. You can enter different numbers to see how your payment changes based on the loan amount, interest rate, and loan term (like a 15-year or 30-year mortgage).The Bottom Line
While a lender can tell you the maximum loan you qualify for, the best amount to borrow is one that lets you feel comfortable. You want to enjoy your home without feeling stressed about payments. Taking time to look at your full financial picture can help you buy a home you love—and can afford for years to come!