Prequalify for a Mortgage Loan: How Much Can I Borrow?

By Karen Lawson
Calculators for Mortgages Columnist

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Doing some research to determine how much you can borrow for mortgage financing can save you time when searching for a mortgage and shopping for a home. Being prepared when you're ready to prequalify will facilitate lenders' ability to provide quotes on the types of loans best suited to your budget. Mortgage Affordability: Including Additional Costs
Homebuyers often focus on getting approved for a mortgage, but may not pay enough attention to the long-term obligation of repaying a mortgage loan. It's important to know that you won't run into financial trouble after a couple of years of making low payments. Using a free mortgage payment calculator, you can enter your estimated mortgage amount, interest rate, and loan term to see how much your principle and interest (P&I) payment will be. Don't forget that your mortgage payment will be higher if you're making a down payment of less than 20%. Your lender will require "impounds," which are property taxes and homeowners' insurance added to your monthly mortgage payment. Usually when starting your loan, lenders also require an additional "cushion" of two months' taxes and insurance payments. Mortgage insurance premiums will probably also be added to your payment if your loan amount is greater than 80% of the sales price. These additional amounts should be considered before you prequalify for mortgage financing.  

Closing Costs and Down Payment Amounts
If you're buying your first home, it's important to consider all costs associated with buying a home. You can expect to pay about 3 to 4% of your loan amount in closing costs and prepaid expenses (taxes, insurance, and other costs of home ownership). Down payment amounts can vary, but many conventional and FHA programs require a minimum of 3% or more. Mortgage lenders can help with referrals to community housing programs that can provide down payment assistance to eligible buyers.  

More than a Monthly Payment: Understanding "Ratios"
Lenders commonly use two ratios to determine mortgage affordability. The "front" end ratio is the amount of your estimated mortgage payment, which includes principal and interest, hazard and mortgage insurance, and property taxes (PITI) divided by your gross monthly income. Ideally, this ratio should not exceed 28% according to current underwriting standards. The second ratio represents the amount of your mortgage payment (PITI) and other debts divided by your gross monthly income. This amount should not exceed 36% of your gross monthly income. Lenders may have some flexibility in prequalifying potential borrowers whose ratios are higher; each case is unique and is evaluated accordingly.  

If you find that you cannot prequalify now, taking time to reduce debt and prepare for homeownership can help prevent financial problems caused by buying a home you can't afford. Ask mortgage lenders about community homebuyer assistance programs in your area.



About the Author
Karen Lawson is a freelance writer with extensive background in mortgage banking. She holds BA and MA degrees in English from the University of Nevada, Reno.