How Much Can You Borrow for a Mortgage: A Guide for First-Time Borrowers

Few people can afford to pay cash upfront when buying a home for the first time, and ask themselves about the actual limits that lenders set on the mortgage loans they offer.

This isn’t always a simple question to answer. The important thing to remember is that you need to have a clear picture of your buying power before you start shopping around for properties.

Mortgage Borrowing Limits

Just like with any other type of loan, the mortgage lender checks your borrowing eligibility when assessing your application. Generally, lenders look for candidates with a stable income and a good credit history. But even if you’ve had some stains on your record, like bankruptcies, you can still qualify for some mortgage types.

If you have a solid income at the moment of applying for a mortgage, you have a good chance of being approved. 

When it comes to mortgages, the amounts that lenders generally offer come with monthly loan payments (including everything from the principal to interest and homeowners insurance) that don’t exceed 28% of your gross monthly income. 

There are also a few other factors you should consider. For instance, if you have a decent salary coupled with an excellent credit score, you may get a better deal.   

While every lender has its own criteria for determining the eligibility for applicants, there are some common denominators. Aside from your income qualification for a mortgage, lenders check the debt-to-income ratio (DTI), which includes your outstanding loans. If your DTI is high, you might not be able to get the mortgage you want.

Unlike unsecured personal loans, mortgage loans require collateral (the property you’re buying). This is why lenders will also check the loan-to-value ratio (LTV), which helps them determine the level of risk. The ratio refers to the relationship between the loan amount and the value of the collateral. 

When qualifying for a mortgage, each lender will also check your credit score. It’s a numerical representation of your creditworthiness, and it can range between 300-800. Since there are different scoring models, your credit score can vary slightly from provider to provider.

The FICO score is the most commonly used by mortgage lenders. You can check it for free on the Experian website. Based on these aforementioned factors, the lender will make you an offer. 

The amount you can borrow for purchasing a house depends on your lender’s evaluation of your financial health. If you have a healthy and steady cash flow, you can expect the amount to be twice as much as your income. For example, if your income is $300,000, all reputable mortgage lenders will offer you a loan of $600,000 or more. 

However, it doesn’t mean that you have to accept the whole amount. The mortgage amount you can borrow is not necessarily the mortgage you can afford.

While all lenders check your credit history and your income, none of them are too concerned about your plans for the future. It’s something you should be aware of. 

For example, lenders can’t know if you’re planning to buy a vehicle or looking for a new job opportunity. They’ll offer you the maximum they think you can afford, but you should be the one who evaluates your own finances and creates a budget for the coming few years.

Buying a home always means a long-term and big investment, so you must be careful when deciding on a mortgage. Choose the mortgage size wisely and without jeopardizing your financial health. 

Use a Mortgage Calculator to Check Your Buying Power

When buying a home, you can quickly become overwhelmed with all the things that you need to consider before applying for a mortgage. From finding a home that fits your needs to choosing the right lender, you need to know exactly what you want and, more importantly, what you can get.

Once you know how much you can afford, you can use a free mortgage calculator to get a better sense of your monthly mortgage payments and other mortgage-related information. 

Aside from calculating your monthly mortgage rates, this tool can also be used to determine tax-related fees and home insurance costs. With a mortgage rate calculator, you can also check different mortgage scenarios based on the down payment, mortgage interest rate, and term length. 

Most lenders allow applicants to see different mortgage options and get personalized quotes for free. You’ll need to complete a questionnaire and provide information about your finances and the property you want to purchase. It’s a simple step-by-step questionnaire that you can find on the lender’s website.

It includes questions about income, monthly rates, and loan terms. In order to qualify for a mortgage, you’ll also need to provide details about the property you want to buy - the location, property type, and estimated value. 

Both the mortgage calculator and a personalized quote can help you find the right mortgage option and map out your budget. You should also consider the length of time you’re planning to live in the house and, based on that, decide whether you need a short-term or a long-term loan.

If you plan to live in the house you're buying for the next twenty years, you’ll get a long-term fixed-rate mortgage, which means more affordable monthly payments, but higher interest rates. 

Other Things to Consider

While qualifying for mortgages, applicants need to remember that lenders are pursuing their own interests. They can offer you a big loan, which can put a serious dent in your future finances. It’s always better to adjust your expectations to your finances than end up with a debt that you cannot pay off on time.

The costs of refinancing your mortgage can also be high, and even though this option can help you consolidate the debt, it’s better not to end up in this position in the first place. 

Another thing you have to consider during the qualification period for a mortgage loan is the down payment. This is a percentage of your home’s purchase price that you pay upfront after inking a loan deal. The down payment can have an effect on how much you are allowed to borrow,  your monthly payments, and whether you have to pay for private mortgage insurance.

Lenders will offer more affordable monthly rates if you’re ready to pay a decent sum of money in advance. In other words, the down payment offers assurances that you aren’t a risky borrower.

Types of Costs Associated With Mortgage Loans 

Generally, there are three types of costs you should have in mind when buying a home: upfront costs, closing costs, and ongoing costs. 

Upfront Costs

These costs can be split into two categories: the down payment and the insurance premiums. For most types of mortgages, you’ll need to make a down payment. But there are some exceptions, including Veterans Affairs-backed mortgage loans, which don’t require a down payment if the sales price isn’t higher than the property’s appraised value.

In other cases, the amount you’ll need to pay after you qualify for a mortgage loan varies from lender to lender.

While you can find lenders that won’t ask for a down payment, there’s no way to avoid paying private mortgage insurance. Mortgage insurance protects lenders from financial loss in case you cannot pay your debt.

You need to purchase insurance upfront and pay for it until a certain percentage of your loan is paid off. Some lenders will ask you to pay insurance during the entire life of your mortgage loan. 

Closing Costs

Closing costs are usually calculated at the beginning of the purchasing process, yet some buyers forget about them until they need to sign the contract with a lender. Each good mortgage qualification calculator or any other financial tool that you can find on lenders’ websites will help you calculate these costs accurately.

Closing costs usually include filing and appraisal fees, as well as state-specific fees and costs.

If you are not sure about the components included in closing costs, you can always contact the lender, and its representative will help you understand how to cover them. Some companies will allow you to roll closing costs into your mortgage. 

Ongoing Costs 

Once you have your own home, you have to start taking care of it. If the floors need repairs or the roof is leaking, you’ll have additional costs. While a mortgage qualifying calculator is useful when it comes to calculating your mortgage payments, it can’t help you with ongoing costs.

It’s the money that you need to put aside every year in case you have to repair something in your new house. A good rule is to set aside 1% to 1.5% of the property’s value for ongoing costs. Aside from repairs, you should also think about maintenance costs and taxes. 

What Can You Do to Get a Better Deal?

If you are not satisfied with the mortgage amount being offered, there are some things you can do to increase your borrowing limit and get a better deal. 

Shop Around Some More

Luckily, there are hundreds of companies that offer mortgages for first-time buyers, as well as for those who want to buy their second home. Shop around to find the company that will offer you a mortgage that fits your needs. Most lenders allow you to prequalify for a mortgage. This way, you can compare mortgage rates at different lenders and find the most affordable offer. 

Increase the Down Payment

A sizable deposit is a smart move because you’ll give the lender an impression that you’re a reliable buyer. A lender will calculate mortgage rates based on your deposit and offer you better repayment terms. With a sizable down payment, you can also decrease mortgage insurance rates. 

Think About the Property You Want to Buy

It’s important to conduct a thorough examination of the property you want to buy. The value of a property depends on many factors, like the distance from the closest school. If it’s not something that’s important to you, you can find a house in another less expensive area. 

Reduce Your Debt 

If you can reduce or completely pay off your debt, you’ll be able to qualify for a better mortgage. Each mortgage lending calculator will show you monthly rates calculated based on different factors, including your credit score. If you pay off your credit card debt, you can expect an increase in your credit score.

There is a wide range of credit repair services that can help you speed up this process.