How Do Mortgage Lenders Decide How Much You Can Borrow?

October 29, 2020
Last updated:
April 13, 2022
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Mortgage lenders decide how much you can borrow, for the most part. But that does not mean you have to take only what they give. What you can borrow is usually determined by your percentage of gross monthly income, debt to income ratio, your credit score, and the amount of money you are willing to put down.

When you visit your lender to get a mortgage for your home, they will tell you the maximum amount you can borrow. But how do they reach this total, and what factors do they take into consideration?

How do they determine that one borrower can take on a bigger mortgage than the next? Mortgage companies make this decision by considering a wide range of factors, including your credit information, your salary, and much more.

Here Are Some of The Common Ways That Mortgage Lenders Determine How Much You Can Borrow:

1. Percentage of Gross Monthly Income

Ideally your monthly mortgage payment should never exceed 28% of your gross monthly income. With that said, every borrower’s daily living expenses are different, and most mainstream conforming loan programs as well as FHA and VA programs allow you to exceed that threshold.

This will ensure that you are not stretched too far with your mortgage payments, and you will be more likely to be able to pay them off. Remember, your gross monthly income is the total amount of money that you have been paid before deductions from social security, taxes, savings plans, child support, etc. Note, when factoring in your income, you usually have to have a stable job or proof of income for at least two years in a row for most lenders.

2. Debt to Income Ratio

Another formula that mortgage lenders use is the “Debt to Income” (DTI) ratio, which refers to the percentage of your gross monthly income taken up by debts. This takes into account any other debts, such as credit cards and loans. Here, lenders will look at all of the different types of debt you have and how well you have paid your bills over the years. Typically, a DTI of 50% or less will give you the most options when qualifying for a mortgage.

So, if you are looking for a conforming loan or a conventional loan through Fannie Mae or Freddie Mac, a DTI anywhere from 45% to 50% is highly recommended. In contrast, an FHA loan has different guidelines. However, those who qualify for this particular loan type may be looking at a DTI of 38% to 45% with a low credit score. That said, if you have an average or above-average credit score, then in most states, you can have a higher DTI, up to 57% in some cases. VA loans also allow for a higher DTI (up to 60% for fixed-rate loans and a max of 50% for adjustable-rate mortgages).

It is important to note that just because you qualify doesn’t make borrowing the highest loan amount possible a good financial decision. Factors such as expected future income, your lifestyle spending and potential future expenses such as college should all be considered before deciding how much you can afford.

3. Credit Scores

As suggested above, another pivotal way that lenders determine how much you can borrow is by factoring in your credit scores. In its most basic terms, your credit score is a three-digit number that shows how you have borrowed and repaid money in the past. A potential borrower with a higher score is considered less of a risk. Alternatively, a lower score indicates that you may be a potential or higher risk to the lender. Ultimately, this matters because borrowers with excellent or even great credit tend to have an easier time qualifying for mortgage loans. This is especially true, even if their debt-to-income ratios are a bit high.

4. The Impact of a Large Down Payment and Other Important Factors to Consider

Of course, there are many other factors that need to be considered, such as the term length of the loan,  the current interest rates, and the size of your down payment. Looking specifically at your down payment, the larger it is, the more likely you are to qualify for a larger loan. Obviously, all the factors mentioned above matter as a whole, but a large down payment can tip the scales in your favor.

In general, the vast majority of mortgage companies are more likely to lend more to well-qualified borrowers, especially If they are willing to make a down payment of 10% – 20%. Consequently, even with a few credit blemishes on your record, if you can save up for a larger down payment, then you should be able to borrow more.

How can I qualify to borrow more?

If you’re disappointed by how much you can borrow, remember that there are many things at play here. As a result, you can make even small improvements, like offering a bigger down payment, as previously mentioned. You can also be a ‘tactical buyer.’ In other words, try to be flexible, if at all possible. A prime example of being a tactical buyer is if you do not need to live in an area with the best school districts right away, then you may want to consider finding a home in a transitioning neighborhood. You could also opt to buy a starter home rather than a forever home. In this instance, you will not be borrowing more money. But instead, you will likely get a better home value and the opportunity to turn a starter home into something special for now.

Of course, if a starter home or fixer-upper just is not in the cards, that is perfectly fine. You can tackle your debt instead. By reducing your debt, even by the tiniest bit, your debt-to-income ratio will go down, which means you will have a higher or better credit score. A nice bump in your credit score can really change how lenders view you (a potential risk or less risky borrower). You can also purchase a home with a co-borrower, which will help to improve your debt to income ratio as well.

Who Can Assist With This Process?

If you need assistance with finding the right lender or if you have general questions about how much you can borrow, a mortgage professional can point you in the right direction.

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Why Choose Sammamish Mortgage?

At Sammamish Mortgage, we understand that finding the right lender for your needs isn’t always easy. But the truth is finding an experienced mortgage lender with your best interest is what’s really hard. That’s why we go above and beyond to offer our applicants a personalized experience and we are available day or night to answer any of your questions.

This includes helping you get a better picture of your home buying future, going over prequalification requirements, as well as helping you get the funding you need.

Sammamish Mortgage has been in business since 1992 and has assisted many homebuyers in the Pacific Northwest. If you are looking for mortgage financing in Washington State, we can help you get pre-approved. Sammamish Mortgage offers mortgage programs in Colorado, Idaho, Oregon, and Washington.

Contact us if you have any mortgage-related questions or concerns. If you are ready to move forward, you can view rates, obtain a customized instant rate quote, or apply instantly directly from our website.

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