7 Ways to Evaluate Your Maximum Borrowing Capacity
3 min readThere are many considerations when determining the amount of money you can borrow for the purchase of a home. Below are seven ways to evaluate your maximum borrowing capacity based on factors assessed by lending institutions.
- Your Income
The amount of money you earn is a key factor in determining how much you can borrow for a home. Generally speaking, banks do not want your loan repayment to be greater than 30 percent of your income after taxes. Whether or not this is the maximum percentage will depend on many factors. There should be a realistic look at how much money you can pay each month without putting yourself in a bind. When buying a home, some people choose to get a second job to make sure they can qualify for the home loan they want.
- Equity In An Existing Property
If you currently own a property that you have had for a long time, you probably have a lot of equity. If this is the case, you are in a much better position as it relates to your borrowing capacity. By selling the home that you have, you can use the equity in that property to reduce the amount of money needed for the home you want to purchase. The fact that you are currently a homeowner will make a difference in how much you can borrow, even if you decide to keep the home you currently own and use it as an investment property. In fact, having an investment property can improve your borrowing capacity because you’ll have rental income.
- Amount of Your Deposit
Another determining factor in your maximum borrowing capacity is the amount of money you put down as a deposit. This is part of the formula used to calculate how much will be approved by the lender. There are many programs that will provide first time homeowners with a chance to purchase a property with a small down payment. Fortunately, there are also programs that offer no deposit home packages.
- Your Current Budget
Your current budget will be considered during the loan approval process. In addition to your income, there will be a detailed analysis of your expenses to determine the maximum borrowing capacity. This is why it’s best to pay off as many debts as possible before you embark upon the journey of buying a home.
- Your Credit Score
Your credit score will dictate the amount of money a bank is willing to lend you for a home, which is why it’s imperative that you actively manage your credit score. Your purchasing power is much greater when you have a high credit score. What determines your credit score is how you have paid your bills in the past. Specifically, if you have late payments, your credit score will drop. Similarly, if you have a lot of credit card debt, it can negatively affect your credit score. Ultimately, a high credit score is another key element that can increase your borrowing capacity.
- Number of Dependents You Have
Another element in determining the amount of money someone can borrow for a mortgage is the number of dependents they have. While this is not heavily weighted in the overall calculation, it is something that will be considered when assessing your borrowing capacity. It’s important to understand that not all lenders have the same criteria, which is why you should consider more than one lender when you’re in the market to buy a home.
- Fees and Charges
There are many fees involved in the lending process when buying a home. The number and amount of the fees for the type of loan you get will play a role in the amount of money you’re able to borrow. This is one of the reasons why it’s wise to pay close attention to loan fees and look for products that don’t have any hidden costs.
These are all factors that you should think about as your embark upon the journey of buying a home. It’s helpful to evaluate your maximum borrowing capacity in advance.
