Reader question: “I’m a first-time home buyer and mortgage shopper planning to buy in 2014. Our combined income (both my wife and I), is about $135,000 per year. We don’t have much debt, aside from our car payments and a bit of credit card debt. How much will a mortgage lender lend to us, given our financial situation?”
Mortgage lenders typically decide how much to lend based on the borrower’s income, as well as the debt-to-income ratio (DTI). Your DTI is basically a comparison between what you earn (your combined household income, in this case), and the amount you spend each month on your various debts. Lenders have a certain threshold they aren’t willing to cross.
For instance, if you take on a mortgage loan that results in a total debt-to-income ratio of only 30%, you’re probably in good shape. But if you’re trying take on a loan that would push your total DTI up to 50%, you might not get approved for that amount.
DTI Often Determines How Much a Lender Will Lend
So the debt-to-income ratio is a decent indicator of how much a mortgage lender might lend you, based on your current financial situation. New lending rules rolled out in January 2014 encourage lenders to draw the line at 43% total DTI. That’s not a hard-and-fast rule. But it’s a pretty good indicator of where the industry is going, and what we can expect in 2014 and beyond.
So, how much will a mortgage lender lend to you? The only true way to find out is to apply for a loan, or at least get pre-approved by a lender. They’ll explain where you stand in terms of your income and debt situation, and how much they might be willing to lend to you based on those numbers.
Keep all of this in mind when using mortgage calculators. First-time borrowers often expect these calculators to tell them (A) how much they can afford to borrow, or (B) how much a lender is willing to lend to them. Calculators do neither of these things. They simply take a loan amount and break it down into estimated monthly payments.
The Perils of Being “House Poor”
How much of a house can I afford to buy … and still be able to enjoy it? That’s the real question you should be asking here. I have known many people over the years who made “ego purchases” when home buying. They chose that big, nice, custom house that was at the upper end of their budget (or beyond). I’m not naming any names, but you people know who you are.
As a result of such an unwise purchase, the homeowners become “house poor.” They can afford their monthly mortgage payments, so they won’t be foreclosed on, but that’s about all they can afford. Quality of life, travel, saving money for retirement … these things are now out of reach because they bought too much house.
This is why I emphasize the monthly budgeting process I’ve described above. If you determine how much you need to spend each month for things other than a mortgage payment — and you are honest and accurate with that process — then you’ll have a pretty good idea of how much house you can afford to take on. Best of all, you won’t have to sacrifice things that are important to you.
So, instead of asking how much a mortgage lender is willing to lend, you should start by asking a different question. How much can you realistically afford to pay each month? It’s important to start at the monthly level and work your way up, because it’s the best and most accurate way to create a budget.
Disclaimer: This article answers a reader’s question: How much will a lender lend to me, based on my financial situation? This article has been provided for educational purposes only and is not meant to take the place of one-on-one mortgage counseling or advice. We encourage all home buyers / borrowers to establish a monthly housing budget, before speaking to a lender. Every lending scenario is different, because all borrowers are different.
Brandon Cornett is a veteran real estate market analyst, reporter, and creator of the Home Buying Institute. He has been covering the U.S. real estate market for more than 15 years. About the author