Mortgage lenders evaluate affordability based on your personal information, including income, debt expenses and size of down payment. The mortgage calculator uses similar criteria.
Here are some of the factors that lenders consider.
Lenders will determine how much of your monthly income goes towards debt payments. This calculation is called a debt-to-income ratio.
Percentage of monthly income that is spent on debt payments, including mortgages, student loans, auto loans, minimum credit card payments and child support.
For example: John and Emily together earn $9,000 a month. Their total debt payments are $3,000 a month. Their debt-to-income ratio is 33.3 percent. ($3,000/$9,000 = 0.33)
A general rule for lenders is that your monthly housing payment (principal, interest, taxes and insurance) should not take up more than 28 percent of your income before taxes. This debt-to-income ratio is called the “housing ratio” or “front-end ratio.”
Lenders also evaluate the “back-end ratio.” It incorporates all debt commitments, including car loan, student loan and minimum credit card payments, together with your house payment. Lenders prefer a back-end ratio of 36 percent or less.
If you have a good credit history, you are most likely to get a lower interest rate, which means you could take on a bigger loan. The best rates tend to go to borrowers with credit scores of 740 or higher.
With a huge down payment, you will probably need to take on a smaller loan and can afford to buy a higher-prices house.
Money from your savings that you give to the home’s seller. A mortgage pays the rest of the purchase price. It’s usually expresses as a percentage: On a $200,000 home, a $20,000 down payment would be 20 percent.
You don’t need to necessarily have a perfect score or a 20 percent down payment to qualify for a mortgage. Many lenders will accept down payments as small as 3 percent. Federal Housing Administration-insured mortgages have a minimum down payment of 3.5 percent.
If you have children who go to school, that is a major expense that lenders don’t typically account for. Or maybe you like to spend a lot on dining out or clothes.