There isn’t one answer — there are two answers.
- The first answer is: a lender can determine the maximum loan amount you can be approved for based on underwriting guidelines, your income and credit score.
- The second answer is: regardless of how much a lender will approve you for, only you can determine how much you are comfortable paying every month for your mortgage.
How much can a lender approve you for?
When a lender analyzes your loan application, they take into account your income, assets, credit score, combined with the loan amount you are seeking, your down payment, the property type, and loan purpose. After taking all these factors into consideration, the lender will determine how much you can be approved for.
How much should you borrow?
The amount you can borrow is whatever the lender can approve you for, subject to your own comfort level for spending on housing each month. Some people use a rule of thumb that your housing expense shouldn’t exceed 50% of your take home pay. In certain areas of the country, that guideline would get you a nice place to live. However in other, high cost areas, that rule of thumb wouldn’t get you a decent place to live.
Only you can determine how much you can handle in terms of your monthly housing payment.
What do lenders look at when they determine how much you can borrow?
Lenders look at your income, assets, down payment, and credit score. But they don’t look at your credit profile in a vacuum. Most lenders refer to the underwriting guidelines for the investors they plan on selling your loan to. The reason they do that is the majority of residential loans are sold in the secondary market. If they can’t sell your loan, they probably won’t approve it.
(c) Copyright Eris Saari 2016, 2019