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How Much Can I Borrow For My Mortgage?

When purchasing your dream home, the first question you should ask yourself is, “How much can I afford?” From there, it’s also wise to consider the amount of money you will need to borrow in order to purchase the house of your dreams.

Whether you’re entering the market as a first-time homebuyer, seeking a secondary investment property, or looking for your next home, you’ll want to have insight into how much you can realistically borrow. By calculating a ballpark figure that you can afford, you’ll be able to look at houses within your price range.

In the world of home loans, this is known as borrowing power. Read on to learn more about how you can understand the way lenders assess your borrowing power and even how you can assess it yourself!

How Lenders Assess What You Can Afford

The formula for assessing borrowing power may vary from lender to lender. Typically, mortgage lenders base the amount of money that you can borrow on several factors. Let’s discuss these various aspects in-depth!

Your Gross Income

The lender will consider numerous income sources before calculating your gross income. These income sources can include your base income, overtime pay, bonuses, commission, tax-free income, and rent from your tenants.

Base Income

No matter where your loan is coming from, all lenders will review your total base income during their assessment as it is the most reliable form of income in the eyes of a lender.

Overtime

In most cases, the bank will accept your overtime pay as income if your overtime pay is regular and ongoing. However, some banks may only allow 50% of your overtime pay to count towards your income.

Bonuses

Since bonuses can often be irregular, most lenders will request that you submit a two-year backlog depicting your history of bonuses. If you can’t provide proof of bonuses over the past two years, most lenders won’t accept bonuses as part of your consistent income.

Commission

If you have been receiving commission for at least a year, some lenders may regard commission that you make as a separate form of income. With the help of your income history, they can assess whether your commission is regular and ongoing.

Tax-Free Income

Lenders typically accept Family Tax Benefits A & B if you have children under the age of 11. Other tax-free income is generally assessed on a case-by-case basis.

Rent

Lenders will also accept rent payments from your investment properties as an acceptable form of income. Lenders will typically count 80% of the total rental income that you receive.

Other Income

The lender may also consider the following as forms of income:

  • Income from your investments or pension
  • Any other earnings not yet mentioned
    • A second job
    • Freelance work
  • Income in the form of financial support
  • Payments for your children from ex-spouses

What You Will Need?

You’re going to need to offer bank statements and pay stubs as proof of your income. If you are self-employed, you’ll have to provide the following instead:

  • Bank statements
  • Business accounts
  • Details of the income tax you’ve paid

Your Payment Responsibilities

These include:

  • Bills for rent, water and sewage, gas, and electricity
  • Credit card repayments
  • Lifestyle-related financial responsibilities
  • Maintenance payments
  • Other loans or credit agreements that you are responsible for

The lender may also request that you estimate living costs associated with recreational activities, unnecessary clothing purchases, excessive restaurant outings, or anything that is deemed a luxury instead of a necessity. They might also ask you for recent bank statements to check against the payment responsibilities that you claim to have.

Future Changes that May Make a Significant Impact

The bank or lender will also assess your ability to pay off a mortgage based on the following:

  • Your interest rates and whether they increased over time
  • Whether or not you or your partner suffered from sudden job loss
  • The possibility that you’re unable to work as a result of illness or accident
  • The fact that your life changed as a result of a career break or pregnancy

So, it’s critical that you also plan how you’re going to meet all of your payments on time. For instance, you can take measures to protect yourself against unexpected and sudden drops in income by opening a savings account. Try to ensure that your savings account always has enough cash to help you survive three months’ worth of life expenses in addition to your mortgage payments.

How To Use an Online Calculator to Estimate Your Mortgage Amount

The internet is home to plenty of online calculators, all of which can make everything easier for borrowers. With an online calculator, you can input values that represent your income as a way of getting an estimate of how much you can borrow from a lender. Let’s explore online calculators and take a look at the step-by-step process you can follow for estimating your potential loan amount.

Start by inputting the following:

  • Your annual pre-tax income
  • Your ideal mortgage term
  • Your preferred interest rate
  • Your monthly recurring debt

Next, enter your monthly HOA dues if you know what they’re going to be. If not, you can skip this step and focus on the results from the calculator. You’ll be able to calculate the following:

  • An estimate of your maximum mortgage amount
  • The fixed rate of your monthly payment
  • The maximum mortgage amount that you’ll qualify for
  • How much your monthly mortgage payment might be

Boosting Your Borrowing Capacity

Luckily, it is possible to improve your borrowing. Several tried, tested, and proven ways can help boost your borrowing power in due time.

Here are some of the top ways by which you can enhance your borrowing capacity:

  • Pay off all of your personal debts to effectively boost your borrowing power.
  • Consider reducing your credit card limit to increase your borrowing capacity.
  • Immediately reduce your credit card limit as much as possible.
  • Work to pay off the balance in full.
  • Increase your borrowing power by a considerable amount.

To Sum it Up

According to an in-depth study, the value of new mortgage commitments was 15% higher than last year. If you’re planning to purchase a new real estate property, you must determine your borrowing power. Once you calculate your borrowing power, you can confidently scroll through lists of homes that fit well within your budget.

 

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All material is presented for informational and educational purposes only and should not be construed as individual financial, investment, or legal advice or instruction. ZeroMortgage does not guarantee the quality, accuracy, completeness or timelines of the information in this publication. While efforts are made to verify the information provided, the information should not be assumed to be error free. Some information in the publication may have been provided by third parties and has not necessarily been verified by ZeroMortgage. ZeroMortgage, its affiliates, and subsidiaries do not assume any liability for the information contained herein, be it direct, indirect, consequential, special, or exemplary, or other damages whatsoever and howsoever caused, arising out of or in connection with the use of this publication or in reliance on the information, including any personal or pecuniary loss, whether the action is in contract, tort (including negligence) or other tortious action. ZeroMortgage does not provide tax advice. Please contact your tax adviser for any tax related questions.

This page last updated: March 21, 2022