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If you’re thinking about buying a home, one of the first questions that will likely be on your mind is how large of a mortgage you’ll be able to qualify for.  In truth, this number will have a major impact on your home search, as certain neighborhoods or certain types of homes might fall outside of your price range if you aren’t able to qualify for a large enough mortgage.

But what goes into determining how much mortgage you’ll qualify for?  Let’s look at a few:

Income

It’s true that income is one of the largest factors involved in determining how large of a mortgage you’ll qualify for, as most mortgage lenders use strict budget ratios when figuring how much you’ll be able to pay each month.  Although different lenders have different requirements, the generally accepted rule is that housing expenses should constitute no more than 30-35% of your monthly after-tax income.

Existing Debt

Another factor that’s included in these budget ratios is the amount of debt you already carry.  After the recent economic downturn, lenders are increasingly wary of any borrowers they feel may not be able to make good on their mortgage obligation.  If you already hold large car loans and have maxed out several credit cards, lenders will be – understandably – concerned that you have more debt than you’ll be able to pay for each month.  If, for example, you were to lose your job, the lenders would be worried that you’d pay off these other debts before their loan.

For this reason, it’s a good idea to pay down any existing debt as much as possible before you ever speak with a mortgage broker about buying your own home.  If you’re having trouble making payments or feel overwhelmed by the debt you carry, a non-profit credit counseling agency may be able to help.  As an added advantage, once you pay of these cards, you’ll have a new cash reserve in case you run into any serious issues as a new homeowner.

Credit Score

Mortgage lenders also use your credit rating in order to determine how large of a mortgage to offer you.  Your credit score – along with the credit history it’s based off of – demonstrates to potential lenders how well you’ve managed credit in the past.  Typically, they like to see a long history of satisfactory accounts, a variety of different types of credit (ie – installment loans, revolving accounts and more), and a report free from bankruptcies or delinquencies.

In the current economic climate, you’ll generally need a score of at least 620 just to qualify for a mortgage.  A higher score – when paired with the other variables described in this article – will help to qualify you for a larger loan or for a loan with better terms.  If your credit score is below this magic number, be sure to check your report for any previously unnoticed errors (as many as 25% of reports have them!), as these could be negatively affecting your score.

If you would like to learn more about the FHA Interest Rate, please go to the home page.