This is the latest in an ongoing series of blog posts addressing some of the most frequently asked questions among home buyers in Washington State. Today we will address what is arguably THE biggest question on the minds of buyers who plan to use a mortgage loan.
And that question is: How much can I borrow for a house in Washington State?
This is an important consideration, because it sets the stage for the rest of your home buying experience. House hunting, wish-lists, offers, negotiations — you can’t do any of these things until you know where your budget lies. Here’s an overview of how mortgage lenders determine how much you can borrow to buy a house in Washington State.
How Much Can I Borrow for a House in Washington?
When you apply for a home loan in Washington State, or anywhere else for that matter, the bank or mortgage company will want to know two things right off the bat:
- How much money do you earn each month?
- How much do you spend each month on your recurring debts?
When you combine these two numbers, you get something that’s known as the “debt-to-income ratio” or DTI. This is one of the qualifying factors that will determine how much you’ll be able to borrow to buy a house in Washington. It’s not the only factor — but it’s one of the most important.
The purpose of debt ratios is to ensure that the borrower (that’s you) is not taking on too much debt in relation to his or her income. It’s a protective measure for the borrower and the lender alike. These ratios have been studied over the years to determine how much risk is associated with a particular loan, based on its size.
Requirements Vary Based on Loan Type and Other Factors
There is no single threshold or cutoff point for debt-to-income ratios. It can vary based on the type of loan you are using and other factors. With that being said, banks and lenders prefer that the borrower’s total debt ratio (including the mortgage payment, credit cards, car payments, etc.) does not exceed 50%. Sometimes the bar is set lower, at 43% or 45%. Again, it varies.
The FHA loan program, for example, sets the bar at 43% for total debt to income (learn more). But they also give lenders some leeway when qualifying borrowers. Mortgage companies can make exceptions for home buyers who have managed similar monthly payments in the past, as well as those with excellent credit and/or significant cash reserves in the bank.
Translation: These numbers are just a guideline. Don’t be discouraged by them. Contact us with your questions.
The bottom line is that taking on a mortgage loan should not put you into financial distress. Nobody wants that. And that’s why lenders use tools such as the DTI ratio to determine how much you can borrow for a home loan in Washington.
In closing, we should mention loan limits as well. These too can affect the amount you are able to borrow when using a mortgage loan to buy a house. All of the major financing programs have certain limits associated with them, and that includes FHA, VA and conventional loan. These limits vary by county (in most cases) because they are based on median home prices. You’ll find a full list of loan limits here.