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How much can you borrow?

Transcript: How much can you borrow?

One of the first steps in buying a new house is to arrange a mortgage loan. The amount you can borrow will depend on a number of factors, including your ability to repay the loan. Your lender will use two ratio-based guidelines to evaluate your ability to repay.

The first is your debt-to-income ratio. Debt-to-income ratio is the percentage of your monthly income that is spent on monthly debt payments.

So that means your expected monthly mortgage payment (principal, interest, taxes, and insurance) plus your other monthly debt obligations are compared to your gross pre-tax monthly income.

Mortgage program guidelines vary, but a good rule of thumb is to keep your total debt level at or below 36% of your gross monthly income.

The second, housing-to-income ratio, is the percentage of your monthly income that is spent on monthly housing payments. So your lender will also compare just your expected monthly mortgage payment (including taxes and insurance) to your gross monthly income. Mortgage program guidelines vary, but a good rule of thumb is to keep your housing expense level at or below 28%.

Even if you fall within these guidelines, make certain that you feel comfortable making your monthly mortgage, insurance, and tax payments along with the payments for all your other monthly obligations.

These obligations include savings, debts or loans, groceries and household supplies, clothing, shoes and accessories, transportation, gifts and charitable donations, Internet, cable, phone, and travel and entertainment. 

And remember, homes have other costs, too, such as utilities, maintenance and repairs, that may not exist if you rent.