“How much can I borrow for a mortgage loan based on my income?”
This is one of the most common questions we received from our readers. The answer to this question has more to do with your debt-to-income ratio and your ability to repay the debt, rather than the loan limits featured on our website. This article explains how mortgage lenders determine the maximum amount you can borrow based on your income.
The short answer: These days, most lenders limit borrowers to a maximum debt-to-income ratio of 45% to 50%. So those applicants who fall above that threshold might have a harder time qualifying for a mortgage loan. But those numbers aren’t set in stone.
How Much Can You Borrow for a Mortgage Loan?
Mortgage lenders review all kinds of factors when considering an applicant for a home loan. They will look at your credit history, your employment history, your income, and the amount of recurring debt you currently have – just to name a few.
But when it comes to determining how much you can borrow for a mortgage loan, the debt-to-income ratio rises to the top. Mortgage lenders use this metric to determine your financial ability to repay your loan, based on your existing debts versus income.
Let’s start with a basic definition and move on from there.
Debt-to-income ratio (DTI) is a comparison between the amount of money a person earns, and the amount they spend on their monthly recurring debts. This ratio is generally expressed as a percentage. For example, a person with a 35% DTI spends 35% of their gross monthly income on their recurring debts.
Getting back to the question at hand: How much can I borrow for a mortgage loan based on my income?
The answer to this question will largely depend on your debt-to-income ratio (including the expected mortgage payments).
- If the monthly payments resulting from your new mortgage loan would end up pushing your DTI ratio too high, then you might have trouble qualifying for the loan.
- On the other hand, if your debt-versus-income ratio falls within the mortgage lender’s parameters, you likely have an easier time getting approved for financing.
So this gives you a general idea of how much of a mortgage loan you could borrow, based on your income. If you calculate the monthly payments for certain loan amount, and then add in your existing debt payments (credit cards, auto loans, etc.), you’ll end up with your total or “back-end” debt-to-income ratio. If that percentage is above 50%, you might have trouble getting approved.
It bears repeating: these numbers are not necessarily set in stone. Some mortgage lenders are willing to take on more risk in the form of higher debt ratios, while others are more conservative. This underscores the importance of “shopping around,” particularly for those borrowers with higher debt levels.
DTI Limits on the Rise
Over the last couple of years, we’ve seen a gradual increase in the maximum DTI limit used by mortgage lenders. There was a time when most lenders set the “bar” somewhere around 43%, or even lower. But during 2017 and 2018, more and more lenders have been allowing debt-to-income ratios as high as 50% – and sometimes even more. It varies from one mortgage provider to the next.
This general loosening trend has been one of the big stories in the mortgage world, over the last year or so. For instance, here’s a quote from a September 2018 article in USA Today:
“Fannie Mae and Freddie Mac, two of the government-sponsored enterprises that fuel the home loan market, raised their debt-to-income limits in July 2017. Now, certain borrowers with a DTI as high as 50 percent can get approved for a mortgage, up from the previous maximum of 45 percent.”
These changes are just one example of how the mortgage industry has eased over the past few years.
Your Ability to Repay The Loan
Mortgage lenders are mostly concerned with your ability to repay the loan, given your current income and debt situation. That’s why they use risk-analysis tools such as the debt-to-income ratio.
They’ll also look at your credit history, which shows how you have borrowed and repaid money in the past. Also, if you have owned a home in the past, your lender will be keenly interested in how you managed those mortgage payments (and the size of those payments).
A mortgage lender might be with more willing to overlook a relatively high debt ratio if the borrower can show that they have managed payments of that size in the past. This is what’s known as a “compensating factor.”
So there’s not just one factor that determines how much you can borrow for a mortgage loan, based on your income. There’s a big-picture analysis that takes place. The debt-to-income ratio is one of the most important factors, but it’s not the only one.
Disclaimers: This article addresses the question, How much can I borrow for a mortgage loan based on my income? Home loan requirements can vary from one lender to the next. Additionally, different loan programs such as conventional, FHA and VA can have different guidelines. This article provides a basic overview for educational purposes only. The general rules and standards mentioned above are not necessarily written in stone. Ultimately, the only way to find out if you qualify for a mortgage loan is to apply for one.