So You Want to Get Approved for a Mortgage: How Much Can You Get?

Buying a house will likely be the biggest purchase you ever make, so figuring out how much you can afford is essential.

If you’ve got a ballpark budget — amazing, that’s a great first step. But it’s hard to know if you’re ready to buy a house if you don’t know how much money you could borrow through a mortgage loan. If you need some guidance around what you can (or can’t) afford, we’re here to help.

A computer used to get approved for a mortgage.
Source: (Austin Distel / Unsplash)

How do lenders assess what you can pay back?

There are several considerations lenders take into account to determine what a borrower can afford, including credit score, income and debt, down payment amount, and so on.

Debt and income

Using your credit report, pay stubs, tax returns, and other key financial inputs, a lender will add up your total household income and your total household debt; this is referred to as your debt-to-income ratio, and is expressed as a percentage.

If your debt to income (DTI) ratio is too high, you will either not get approved for a very high amount, or you will be declined altogether until you pay down your debt. Per the Qualified Mortgage rule adopted in 2014, most lenders will require that your DTI be no higher than 43%, although some products will allow that to go slightly higher.

Credit score

Using reports from the three major credit bureaus: Transunion, Experian, and Equifax, a lender will pull your credit score.

It’s a good idea to stay on top of your score by subscribing to a credit monitoring service through one of these bureaus, so you’re not shocked by the numbers when the lender pulls your report.

(In fact, you’re entitled to a full credit report at no cost from each of the three nationwide credit reporting companies annually. You can order one online from annualcreditreport.com.)

You don’t need a perfect credit score to buy a home, but if your credit score is too low, it can affect how much a lender will approve you for or if you will be approved at all. You may still qualify for FHA (Federal Housing Administration) loans with a credit score as low as 580, but you’ll need to commit to at least a 10% down payment.

If you’re stuck in the low 500s, however, or want to go the conventional loan route — you may need to do some credit score clean-up work before you’ll qualify for a loan.

“What we’ll do in that situation is put the buyer through a credit repair program to try to get their score up,” says top-selling Charlotte-based real estate agent Greg Martin.

Check out HomeLight’s guide to improving your credit score as you gear up to buy a home featuring great tips on how to dispute credit report errors, settle outstanding debts, and pay down your balances.

Down payment

The amount of money you’re able to put down not only informs whether or not you will be approved for a loan, it also determines the type of loan you will be approved for. The different types of loans are:

  • Conventional loans:
    A conventional loan is a loan that is not guaranteed by a government agency. These loans are serviced by banks or other private financial institutions, and usually don’t have any special requirements. Lenders of conventional loans look at your entire credit history when evaluating how much loan you’ll qualify for, although it’s possible to get approved for a conventional loan with a credit score as low as 620.
  • FHA loans:
    An FHA loan is a loan from a lender that is approved and insured by the Federal Housing Administration, and these loans require as small as a 3.5% down payment. However, there are often additional conditions that you’ll need to meet, and the appraisal has to be done by an FHA-approved appraiser.
  • VA loans:
    A VA loan is a loan issued by the Veterans Affairs department of the U.S. government. With a VA loan, you may be able to get a 0% down loan, but you do have to meet the eligibility requirements.

First-time homebuyer programs and government assistance programs can help those buyers who are just starting out or need help. “We have a program here called House Charlotte, which is a down payment assistance program,” comments Martin. “You have to prequalify to meet the income limits, but if you stay in the home for more than 10 years, it works like a grant and you don’t have to pay it back.”

Other qualifying costs of getting a mortgage loan

When determining how much you can afford, lenders will also look at the following items that are contingent on your credit, DTI, and down payment (note: these aren’t the only costs of a mortgage, but they are key factors that are accounted for in how much you can afford).

Interest rates

You will have to pay interest on the mortgage loan, and the interest rate a lender will approve you for, again, depends on your credit score and debt-to-income ratio. Generally, the worse your credit score, the higher your interest rate (if you’re approved at all). Interest rates fluctuate according to the Federal Reserve Board, and locking in a low interest rate can save you hundreds of thousands of dollars over the life of a loan.

Mortgage insurance

Let’s say you go to get a mortgage, but decide that putting down 20% just won’t be feasible. You’re not out of luck. Some conventional loan programs allow down payments as low as 3%. But that makes you a riskier borrower in the eyes of the lender.

Enter mortgage insurance (or what’s called private mortgage insurance — PMI — on conventional loans). Basically, it’s insurance for the lender in case your loan goes into default. If your down payment is less than 20%, usually a lender will require that you pay PMI. Government-backed programs also may tack on their own form of mortgage insurance.

Additional costs

When calculating how much you can afford, your lender will also likely take into account the closing costs (origination fees, lender fees, settlement fees, and other fees, which can total on average between 2% and  5% of the purchase amount), your taxes and insurance payments, and any reserve amounts that might be required.

Most lenders will look to see that you have at least two month’s worth of monthly housing expenses saved up in addition to your down payment.

Cash used to pay for a mortgage.
Source: (Katie Harp / Unsplash)

So how much can you afford?

Here are some scenarios run through HomeLight’s Home Affordability Calculator with different credit scores, incomes, and $25,000 worth of student loan debt so you get a feel for how much you might be approved. We plugged in the city of St. Louis, Missouri, just for example’s sake; these numbers would also vary based on your location.

Credit Score Salary Student Loan Debt Down Payment Interest Rate Amount You Can Afford
580 $40,000 $25,000 $10,000 5.69% $27,100
580 $60,000 $25,000 $15,000 5.69% $104,200
580 $80,000 $25,000 $20,000 5.69% $180,600
580 $100,000 $25,000 $25,000 5.69% $257,000
650 $40,000 $25,000 $10,000 4.92% $29,600
650 $60,000 $25,000 $15,000 4.92% $112,300
650 $80,000 $25,000 $20,000 4.92% $195,100
650 $100,000 $25,000 $25,000 4.92% $278,000
705 $40,000 $25,000 $10,000 4.13% $31,500
705 $60,000 $25,000 $15,000 4.13% $121,800
705 $80,000 $25,000 $20,000 4.13% $212,200
705 $100,000 $25,000 $25,000 4.13% $302,700
805 $80,000 $25,000 $20,000 3.75% $221,300
805 $40,000 $25,000 $10,000 3.75% $32,500
805 $60,000 $25,000 $15,000 3.75% $126,800
805 $100,000 $25,000 $25,000 3.75% $315,800

Here are those same scenarios with $10,000 worth of student loan debt:

Credit Score Salary Student Loan Debt Down Payment Interest Rate Amount You Can Afford
580 $40,000 $10,000 $10,000 5.69% $51,300
580 $60,000 $10,000 $15,000 5.69% $127,600
580 $80,000 $10,000 $20,000 5.69% $204,000
580 $100,000 $10,000 $25,000 5.69% $280,500
650 $40,000 $10,000 $10,000 4.92% $55,000
650 $60,000 $10,000 $15,000 4.92% $137,800
650 $80,000 $10,000 $20,000 4.92% $220,600
650 $100,000 $10,000 $25,000 4.92% $303,500
705 $40,000 $10,000 $10,000 4.13% $59,400
705 $60,000 $10,000 $15,000 4.13% $149,700
705 $80,000 $10,000 $20,000 4.13% $240,200
705 $100,000 $10,000 $25,000 4.13% $330,600
805 $40,000 $10,000 $10,000 3.75% $61,800
805 $60,000 $10,000 $15,000 3.75% $156,100
805 $80,000 $10,000 $20,000 3.75% $250,600
805 $100,000 $10,000 $25,000 3.75% $345,100

And here are those scenarios with $50,000 worth of student loan debt:

Credit Score Salary Student Loan Debt Down Payment Interest Rate Amount You Can Afford
580 $40,000 $50,000 $30,000 5.69% $8,100
580 $60,000 $50,000 $15,000 5.69% $65,400
580 $80,000 $50,000 $20,000 5.69% $141,800
580 $100,000 $50,000 $25,000 5.69% $218,100
650 $40,000 $50,000 $35,000 4.92% $6,300
650 $60,000 $50,000 $15,000 4.92% $69,953
650 $80,000 $50,000 $20,000 4.92% $152,800
650 $100,000 $50,000 $25,000 4.92% $235,600
705 $40,000 $50,000 $35,000 4.13% $8,923
705 $60,000 $50,000 $15,000 4.13% $75,300
705 $80,000 $50,000 $20,000 4.13% $165,800
705 $100,000 $50,000 $25,000 4.13% $256,100
805 $40,000 $50,000 $40,000 3.75% $12,600
805 $60,000 $50,000 $15,000 3.75% $78,200
805 $80,000 $50,000 $20,000 3.75% $172,700
805 $100,000 $50,000 $25,000 3.75% $267,000

As you can see from the bottom table, with a higher amount of student loan debt, you need a higher down payment to be able to qualify for a low mortgage amount.

But every individual situation is different, so use HomeLight’s affordability calculator to see what you can afford in your city. Then, to know for sure what you can get approved for, apply for a mortgage and talk to a mortgage loan officer about your financial situation.

Header Image Source: (Evan Dvorkin / Unsplash)

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