The mortgage you can qualify for depends on several key factors including your income, debt, credit score, down payment, and overall financial situation. Here are the main considerations and how lenders typically evaluate them:
Key Factors Affecting Mortgage Qualification
- Income and Debt-to-Income Ratio (DTI):
Lenders generally want your total monthly debts, including your anticipated mortgage payment, to be no more than about 36% to 43% of your gross monthly income. For example, the common 36/43 rule means housing costs should be ≤36% of income, and total debts ≤43% of income
- Credit Score:
Most lenders require a minimum credit score around 620 to qualify for conventional loans. Lower scores may qualify for FHA loans but often require higher down payments and may have higher interest rates
- Down Payment:
A larger down payment improves your chances of qualifying and may lower your interest rate. FHA loans allow down payments as low as 3.5% for credit scores 580 and above, or 10% for scores between 500-579
- Loan-to-Value Ratio (LTV):
This ratio compares the loan amount to the home’s value. A lower LTV (meaning a larger down payment) is viewed more favorably by lenders
- Other Expenses and Creditworthiness:
Lenders also consider your monthly expenses, employment history, and overall creditworthiness.
How to Estimate Your Mortgage Qualification
- Mortgage Calculators:
You can use online mortgage affordability calculators to estimate how much you can borrow based on your income, debts, down payment, and interest rates. Examples include tools from ABN AMRO, De Hypotheker (Netherlands), Chase, Zillow, NerdWallet, Fidelity Bank, and CIBC
- Pre-Qualification/Pre-Approval:
Getting pre-qualified or pre-approved by a lender involves a preliminary review of your finances and gives you a clearer idea of the mortgage amount you can qualify for
Summary
To find out what mortgage you can qualify for, assess your gross income, debts, credit score, and how much you can afford as a down payment. Use mortgage calculators for estimates and consider getting pre-approved by a lender for a more accurate figure. Generally, lenders expect your monthly mortgage payment to be no more than about 36% of your gross monthly income, and total debts no more than 43%, though FHA loans have slightly different guidelines
