Whats Behind The Numbers In Our How Much Can I Borrow Mortgage Calculator
When buying a home, the question How much can I borrow? should be the second question you ask. The most important consideration is, How much house can I afford? Thats because, even with all the angst involved in applying for and being approved for a home loan, lenders are often inclined to loan you more money than you expect.
Thats a surprising and important reality.
As much as you want to buy a home, lenders want to loan you money. And the bigger the loan, the happier they are. Youll know why when you see the estimate of the interest youll pay over the life of the loan. Its a really big number.
But if you know how much home you can afford, of course, youll want to learn how much you can borrow. The NerdWallet How much can I borrow? calculator can give you a solid estimate.
The calculator considers standard mortgage payment elements, such as principal and interest. Then, we take things a few steps further, factoring in taxes, insurance even homeowner association dues to help determine a real-life monthly payment.
We also examine your income and debt, just as a lender would, to determine the maximum home loan amount youre likely to qualify for.
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There Are Many Different Mortgage Options Available
There are a variety of different mortgage options available to suit all lifestyles and budgets. A 30-year mortgage is the most popular, but your loan term could be as little as 10 years. Most mortgages have a fixed interest rate, which doesn’t change over the life of the loan. However, if you’re willing to accept a degree of risk, you might opt for a mortgage with an adjustable interest rate. These usually have much lower interest rates for a limited amount of time, but the interest rate could become much higher if interest rates rise.
Discuss your lifestyle and budget with your lender to determine which mortgage option works best for you.
What Income Do I Need To Qualify
The most surprising aspect of how to get a mortgage is the importance lenders place on debt-to-income ratio. Fair Isaac Corporation , the industry leader in credit scores, surveyed lenders who said that a poor debt-to-income ratio is the No. 1 reason mortgage applications are denied.
The unsurprising news is that most people dont know what a debt-to-income ratio is. It is the ratio of our monthly debt payments divided by your gross income. Lenders use it to measure your ability to handle mortgage payments.
For example, if your make $4,000 a month and pay $1,500 for credit cards, $300 for car loan and $200 for student loan, your debt-to-income ratio would be 50% .
A good consumer debt-to-income ratio is 36%, but conventional mortgage lenders like to see that number under 30%. The national average for conventional home loan applicants in July of 2017 was 25%. Note that the ratio includes your projected monthly mortgage payment.
Things are a little looser with FHA where the debt-to-income ratio limit is 28%, but that is still far less than the suggested figures for mortgage hopefuls. The federal government says the highest ratio you can have for a qualified conventional mortgage is 43%. Most lenders put the suggested debt-to-income ratio at 36% or less.
Refinancing is another option. It is important that you not add any additional debt during the home-buying process.
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The Advantages Of Paying 20% Down
- Improves your chances of loan approval: Paying 20% down lowers risk for lenders. A larger down payment also makes you look like a more financially responsible consumer. This gives you better chances of qualifying for a mortgage.
- Helps lower your interest rate: Paying 20% down decreases your loan-to-value ratio to 80%. LTV is an indicator which measures your loan amount against the value of the secured property. With a lower LTV ratio, you can obtain a lower interest rate for your mortgage. This will help you gain interest savings over the life of your loan.
- Reduces your monthly payment: A large down payment also significantly decreases your monthly mortgage payments. Though you spend more now, having lower monthly payments will make your budget more manageable. This gives you room to save extra money for emergency funds, retirement savings, or other worthwhile investments.
- Helps build home equity faster: Paying 20% down means paying off a larger portion of your loan. This allows you to pay off your mortgage sooner. If you plan to make extra payments on your mortgage, having 20% equity will help speed up this process, allowing you to cut a few years off your loan term.
- Eliminates private mortgage insurance : As mentioned earlier, PMI is an added cost on a conventional loan if you pay less than 20% on your mortgage. Consider paying 20% down to avoid this extra fee.
Know the Closing Costs
Two Types Of Conventional Loans
- Conforming Conventional Loans: Conventional mortgages follow assigned loan limits established by the Federal Housing Finance Agency . In 2022, the maximum conforming limit for a single-unit home in the U.S. continental baseline is $647,200. If this is the maximum conforming limit in your area, and your loan is worth $600,000, your mortgage can be sold into the secondary market as a conventional loan. We publish maximum conforming limits by county across the country.
- Non-conforming Conventional Loans: Also called jumbo loans, non-conforming conventional mortgages exceed the assigned conforming loan limits set by the FHFA. These loans are used by high-income buyers to purchase expensive property in high-cost locations. The conforming loan limit for high-cost areas are 50% higher than the baseline limit, which is $970,800 for single-unit homes as of 2021. Jumbo mortgages have stricter qualifying standards than conventional loans because larger loans exact higher risk for lenders.
PMI on Conventional Loans
Private mortgage insurance or PMI is required for conventional mortgages when your down payment is less than 20% of the homes value. This is an added fee that protects your lender if you fail to pay back your loan. PMI is typically rolled into your monthly payments, which costs 0.5% to 1% of your loan per year. Its only required for a limited time, which is canceled as soon as your mortgage balance reaches 78%.
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Showing The Seller You Have The Funds
When buyers who use mortgage loans submit a written offer to buy a house, they usually include a copy of their mortgage pre-approval letter. Or their agent will submit it on their behalf. Either way, its important to show the seller you have the funds needed to complete the purchase.
Its also common for sellers to request proof of funds from the buyer. They usually want to see evidence that the buyer has money in the bank for their down payment . Real estate agents refer to this as a proof of funds letter, fittingly.
Sellers want to see this for a fairly obvious reason. They want to make sure theyre not wasting their time and taking their home off the market for a buyer who wont be able to reach the finish line and close the deal.
So, if you offer more than your pre-approval amount on a home, be prepared to show documents that prove you can actually afford it.
Mortgage Offers Can Help You Save
There are several national and state programs that can help you save money on your mortgage. Spend time researching what you qualify for, as well as what restrictions apply, to see if you can get a better deal.
Many state and local governments offer first-time homebuyer programs which encourage residents to buy within their home state. The Energy Efficient Mortgage program is ideal for people looking at green homes, while FHA 203 loans might suit you if you want a fixer-upper. If you’re buying in a rural area, see if a U.S. Department of Agriculture loan may be right for you. Veterans or active-duty servicemembers, or members of the Guard or Reserve, may be eligible for a VA loan which can help save them money with low or no down payment options and no mortgage insurance requirements.
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Find A Lower Mortgage Rate
Getting the best mortgage rate will result in a lower regular mortgage payment, which will reduce the overall cost of homeownership. Finding a lender whoâll approve you for a lower mortgage rate will let you put a larger portion of your payments towards the principal, rather than the interest.
There are several ways to find a lower mortgage rate but your best bet is to compare all of the products on the market, from a variety of lenders. Different mortgage providers are comfortable with different levels of risk and profit margins, so may offer vastly different mortgage rates in the same market. Not comparing rates before you get pre-approved could lead to you paying thousands more each year!
Itâs also important to consider the terms and conditions of your mortgage and mortgage rate. Depending on your circumstances and the current market conditions, a 5-year fixed mortgage rate and a 3-year variable mortgage rate could each wind up costing very different amounts. As such, itâs important that you know the differences between different mortgage products, and pick the one that is best for you.
Should You Take Out A Larger Mortgage To Pay For Home Improvements
by Maurie Backman | Updated July 19, 2021 – First published on July 12, 2020
Many or all of the products here are from our partners that pay us a commission. Its how we make money. But our editorial integrity ensures our experts opinions arent influenced by compensation. Terms may apply to offers listed on this page.
Home improvements can be costly, and a larger mortgage could give you the cash to cover them. But should you go that route?
Many people who apply for a mortgage want to borrow enough money to cover the purchase price of the home they’re buying . But what if the home you’re buying will need improvements? If that’s the case, you may be tempted to take out a higher mortgage.
Here’s how that might work. Say your home costs $200,000. You have $50,000 available for a down payment. So you plan to only borrow $150,000. However, that’s a larger down payment than your lender will ask for. Most lenders are more than satisfied with a 20% down payment. For this example, a 20% down payment would only be $40,000. In this case, you could simply put down less money , get a larger mortgage , and use the remaining funds to cover home improvements.
Both of these options will give you access to the money you need to improve your home. But is taking on a larger mortgage a good idea?
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Check Your Credit Report And Credit Score
Your first step toward getting a mortgage with bad credit is to find out exactly what information is contained in your credit report . You can do this by requesting a copy of your from one of the three major credit bureaus Experian, Transunion or Equifax.
You would normally be able to get one free credit report per year from each one of the credit bureaus. However, because of the economic impact of the pandemic, you are able to request a free weekly report until April 2022.
Learning to read your credit report is important because youll be able to verify that all the information included is correct. If you do spot errors, you can remove items from your credit report, which can provide a boost to your score.
Your next step is to find out what your credit score is. You can buy this information from any of the credit reporting bureaus, but you can also get it for free from sites such as Credit Karma. Some credit card and bank loan statements will also include the information at no cost.
Before You Apply For A Further Advance
Before you consider applying for a further advance, you should make sure that all of the following apply:
- youve got a good credit record
- you feel comfortable with the additional monthly payments and youve worked out that you can afford them
- the value of your home has increased beyond the mortgage amount you originally borrowed known as having equity in your property.
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What Factors Impact The Amount You Can Borrow
Lenders consider several factors in determining the amount you qualify for, including:
Your debt-to-income ratio. Our How much can I borrow calculator? depends on an accurate input of your income and recurring debt. Youll want to really hone those figures down to a fine point, because lenders will be using them too.
Your loan-to-value ratio. This ratio is a function of the amount of money you put down. If you want to drill down on this calculation, use NerdWallets loan-to-value calculator.
Your credit score. This number impacts the pricing of your loan, more than how much youll qualify for. But thats really important. If you dont know your score, get it here.
Loan Type And Interest Rate
The type of mortgage you choose can affect the mortgage rate youre offered and therefore the sum you can borrow. The differences tend not to be huge, but every bit helps when youre paying interest on a large sum over a long time.
Lets take a single month, June 2021, as an example that shows those differences. We got our figures from the ICE Mortgage Technology Origination Insight Report.
Here were the average interest rates across three major loan types:
- All loans: 3.22%
- FHA loans: 3.23%
- VA loans: 2.92%
The differences can be even greater if you choose a shorterterm loan rather than a 30year one, or if you opt for an adjustablerate mortgage .
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How To Get Pre
House hunting is a funny thing â you can go in thinking you know exactly what kind of place you want, but then a home unexpectedly blows you out of the water! Thatâs a wonderful experience, but it can be a challenge to your budget.
If youâve decided you want to increase your mortgage amount, then it might take a bit of work. Getting a bigger mortgage isnât as easy as some first-time homebuyers might think. Especially post-covid, mortgage providers are being more cautious about lending large amounts of money.
That said, if youâre trying to buy a home thatâs more than your maximum budget, or the amount youâve been pre-approved for, there are still a few ways you can try to get a larger mortgage. Below are some of the steps youâll want to consider taking.
Put At Least 20 Percent Down
If youre buying a home and your down payment is at least 20 percent of the homes price, you wont have to pay for private mortgage insurance , so you might be able to get a bigger loan. PMI, which protects the lender if you stop paying your loan, becomes part of your monthly payment and can decrease the size of the loan youre eligible for.
If you still have cash available after you make a 20 percent down payment, you could pay your lender more upfront to buy down your interest rate.
Not only will you qualify for a higher loan amount, but you will save thousands of dollars over time, too, says Casey Fleming, a mortgage advisor at C2 Financial Corp. in San Jose, California.
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Raise Your Credit Score To Get A Lower Rate
The interest rate you receive on a loan is tied to your credit score. By raising your credit rating, youre able to get a lower mortgage rate, meaning youll be approved for a higher loan amount.
Getting just a half a percent lower rate on your loan could allow you to borrow thousands of dollars more.
One of the most common ways borrowers can increase their credit rating in a hurry is by paying down their credit card balances. If you are carrying high credit card debt, your credit score is taking a big hit because your accounts for 30% of your overall score.
Tips to Improve Your Credit Score before Applying
How Much Home Can I Afford
There is a relatively simple formula to find out how much house you can afford. It starts by putting down honest numbers that reflect your income, minimum monthly debt payments, money available for down payment and credit score.
Take your numbers and find an online calculator designed to come up with how much house you can afford. Youll need to provide your income, monthly debt payments, estimated property taxes, homeowners insurance and home association fees. Answer 5-6 questions and the calculator will spit out a number that should be reasonably close to how much house you can afford.
Armed with that number, you can start house hunting.
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Set Your Sights On A Less
If you can’t qualify for the amount of mortgage you want and you aren’t willing to wait, you can opt for a condo or townhouse instead of a house, which might be less costly. Also, opting for a smaller home with fewer bedrooms, bathrooms, or less square footage as well as considering a more distant neighborhood may provide you with more affordable options. If necessary, you could even move to a different part of the country where the cost of homeownership is lower. When your financial situation improves over time, you might be able to trade up to your ideal property, neighborhood, or city.