How do lenders decide the maximum mortgage amount for each applicant?
Lenders make this determination based on several factors, including your downpayment, the market value of the home and how much you owe to other creditors. If possible, lower your debt before applying for a mortgage because the less you owe, the more you can borrow. Typically, lenders want your housing costs (mortgage, real estate taxes and insurance) to total no more than 28% of your gross (before tax) income. Lenders will usually limit your total debt (including car payments and credit card debt) to 36% of your income. This is called your debt-to-income ratio. Because mortgage interest is tax deductible, homebuyers typically have to pay less income tax than they did before they bought. This situation means that many buyers can adjust their monthly withholding so that they get more money in their paycheck. Consult a tax professional for help calculating the tax benefits of homeownership and the proper withholding. Or visit the IRS website for more information.
