How much mortgage can I get? This is one of the most common questions people ask when planning to own a home. Indeed, having a place where you and your family can confidently call home is a primary goal for most people here in the United States.
Simply put, a mortgage is an official financial agreement between you and an institution such as a bank or individual lender that gives the lender the right to recover or sell your property if you fail to repay the loan you borrowed, plus the interest agreed upon when signing the agreement. A mortgage is a convenient way of owning property as it allows you to acquire property without unnecessary financial strain. The lender will give you the opportunity to repay the loan in monthly installments for a given time.
How Much Can I Borrow?
The amount of money that you can borrow to purchase a property is based on a number of factors. The lender will carefully evaluate the following factors to find the amount of mortgage that you qualify for. Below is an overview of these factors to help you answer the question, how much can I borrow mortgage from providers?
1. Down payment/ deposit
One of the guaranteed ways of increasing the amount of money that lenders or financial institutions such as banks loan you as a mortgage is by paying a down payment. Therefore, it is imperative to put aside some money to pay to the lender as a deposit.
2. Annual salary
A high annual salary is an advantage when applying for a mortgage. Lenders will use this factor to determine your financial stability as well as the ability to repay the loan on time. According to NerdWallet Mortgage Calculator, if your annual salary is $100,000, the bank can loan you money to purchase a home or property worth $ 351,763. You will be required to present payslips and bank statements to help the lender calculate your annual income before tax.
3. Credit cards
Contrary to popular belief, having little or no debt on your credit card does not mean that you have a higher borrowing power than someone who has racked up debt on his or her credit card. This is based on the fact that most lenders, including banks, are cautious about such scenarios. The assumption is that you might decide to spend up to your card limit if the need arises.
Ideally, your loan eligibility drops once you pass 40 years old. Age helps banks to evaluate your ability to repay the loan without experiencing financial constraints or turmoil... For example, the conventional home loan repayment period is 30 years. It would, therefore, be difficult for a 65-year old applicant to repay a $100,000 mortgage before they hit 100 years. As a result, the bank could decide to decline the application, reduce the repayment period to 10 years or so, or increase the interest rate to cater for the risks.
5. Monthly repayments
A high monthly repayment means that you will be able to repay the loan within a short time. As a result, banks will be more comfortable loaning you more money as the risk of default is lower.
6. Type of building you intend to buy
Different properties have varying risk levels. In most cases, manufactured and multi-family homes attract higher mortgage rates than detached single-family homes.
7. Your credit score
A credit score is a three-digit number that is used to determine your ability to repay the mortgage on time. A high credit score means that you are financially stable and have lower chances of defaulting. Lenders often compare credit score reports from three companies when determining a borrower's mortgage pricing. A high credit score will help you to get a better mortgage rate.
8. Loan amortization and type
There are two primary loan options, the fixed rate mortgage, and an adjustable ARM loan. A fixed rate loan attracts higher rates than an ARM loan. Note that the interest rate associated with an ARM loan is not static, that is, it can change based on the financial markets. On the other hand, the interest rate on a fixed mortgage loan remains the same throughout the repayment period.
How to Borrow Mortgage
There are a number of things that you need to do to increase your chances of qualifying for a mortgage namely:
- Check your credit score
Repay all existing loans and bills on time to boost your credit score. More importantly, make sure that the information in the report is accurate. If you identify errors, don't shy away from contacting the credit bureau to rectify it.
- Improve your debt-to-income ratio (DTI)
Debt to income ratio will help you determine the amount of money that you can borrow to purchase a property without straining yourself financially. Most of the financial institutions prefer a DTI of less than 36 percent. Increasing your income streams and clearing your debts is one of the best ways of improving your DTI.
- Consider down payment
Plan how you are going to accrue enough money to pay as the down payment to your preferred financial institution. Most people pay 20 percent of the total home purchase price as a down payment to the mortgage provider. Consult the lender to find out the amount of money that you should pay as a down payment to make the necessary financial plans.
- Choose the right type of mortgage
There are different types of mortgages in the market today. For example, you can opt for a fixed rate loan with a fixed interest rate or an adjustable rate loan depending on your financial capability and preferences.
- Be pre-qualified and pre-approved for the mortgage
Pre-qualification is an informal process that involves answering all the lender's assessment questions. Your answers will help the lender to ascertain if you qualify for a mortgage and the amount of money that you can borrow. At this stage, there is no guarantee that you will get the mortgage, but the information will give you a clear perspective of the type of home that you should look for.
Pre-approval means that the lender has carefully analyzed your credit report, confirmed your assets, and annual income, and determined that you qualify for a loan. You will get a formal document with details of the maximum amount of loan that you can get from the institution based on the information you provided. Concisely, at this stage, the question of how much mortgage can I get will be addressed by the lender conclusively.
- Choose the right provider
Compare the interest rates and the terms and conditions associated with the mortgage offered by all the banks or financial service providers on your list to make an informed decision.
- Close on your property
Once your mortgage application is approved by your preferred financial institution, you can go ahead and sign the agreement documents. Make sure that you have the closing funds in hand to avoid any delays and inconveniences at this stage.
A mortgage is one of the most convenient ways of owning a home or property. Make sure that you follow all the steps highlighted above. Read and understand all the clauses in the agreement documents before signing to avoid surprises down the road. If something is unclear, don't shy away from asking for clarification. We wish you all the best in your mortgage application process.