Mortgage Calculator: How Much Can I Borrow?

When buying a home, the question, “How much can I borrow?” should be the second question you ask. The most important consideration is, “How much house can I afford?” That’s because even with all the angst involved in applying for and being approved for a home loan, lenders are often inclined to loan you more money than you expect.

That’s a surprising — and important — reality.

As much as you want to buy a home, lenders (likely) want to loan you money. And the bigger the loan, the happier they are. You’ll know why when you see the estimate of the interest you’ll pay over the life of the loan. It’s a really big number. But if you know how much home you can afford, of course, you’ll want to learn how much you can borrow.

Different mortgage terms can have a radical impact on your monthly payments and the overall interest you’ll pay. For instance, you may consider:

• How long will I live in this home? That can greatly impact your decision on whether to choose a 30-year fixed rate loan or a shorter term. The longer term will provide a more affordable monthly payment, but you’ll pay a lot more interest over the long term. A 15-year fixed-rate mortgage will cost you way less interest over the life of the loan, but your monthly payment will be considerably more.

• Should I pursue an adjustable-rate mortgage or a conventional mortgage? If you plan on being in this home for just a few years, a 5-year ARM could be a good option. You’ll enjoy a lower initial interest rate that’s fixed for five years, but the rate changes every six months after that.

Down payment costs are just the beginning — you’ll also have to account for closing costs and ongoing homeowner expenses, like property taxes and insurance, and you’ll want to budget for maintenance costs.

If you’re putting down less than 20% on the home, you’ll have to pay private mortgage insurance, or PMI. This is often a few hundred dollars per month. Closing costs are typically equal to 2% to 6% of the price of the home, which comes out to thousands (or tens of thousands) of dollars.

In some respects, the mortgage lending industry is working against your best interest. If you are deemed a qualified borrower, a lender is prone to approve you for the maximum it believes you can afford. But in some cases, that amount may be too generous.

Buying a home always means dealing with big numbers. And the impact on your budget may seem to be a stretch, particularly in the beginning. The challenge is buying a home that meets your current and future needs, without feeling like all of your money is in your home, leaving you without the financial freedom to travel, save for other priorities and have a cash flow cushion.

Consider the 28% rule, which states that mortgage payments shouldn’t be more than 28% of your pre-tax monthly income. If you’re not comfortable with nearly a third of your income going toward your mortgage, you’ll want to avoid shopping at the top of your budget.

Now that the NerdWallet “How much can I borrow calculator” has given you an idea of your buying power, you may want to gut-check the number with these next steps.

• Talk to more than one lender. You are more likely to get a better interest rate by comparing terms offered by multiple lenders, and it might be illuminating to see the loan amounts different lenders will qualify you for.

• Consider all homeownership expenses. It’s not just what’s built into your monthly payment — such as insurance, taxes and the rest — but the other having-a-home expenses, like structural upkeep, new furniture, or yard maintenance equipment.

Lenders consider several factors in determining the amount you qualify for, including:

• Your debt-to-income ratio. Typically, lenders will want your total debts to account for no more than 36% of your monthly income. You can use our debt-to-income ratio calculator to help you find this figure.

• Your loan-to-value ratio. This ratio is a function of the amount of money you put down. If you want to drill down on this calculation, use NerdWallet’s loan-to-value calculator.

• Your credit score. This number impacts the pricing of your loan more than how much you’ll qualify for, but the pricing of your loan is really important. Most lenders will require a minimum score of 620 in order to qualify. If you don’t know your score, get it here.

If you’re disappointed by the “how much can I borrow” results, remember that there are many factors at work. Small improvements in one or more factors can make a substantial difference:

1. A bigger down payment always helps. The more money you put down, the better you’ll look in the eyes of the lender.

2. Be a tactical buyer. Consider your priorities at the current moment and think about any items on your wishlist that you can forgo for now; maybe buying a starter home rather than a forever home. For instance, if you hope to grow your family but don’t see yourself with school-age children in the near future, you may deemphasize school districts in your home search.

3. Reduce debt; even a little. Paying off — or down — a credit card or two can help in several ways. Your debt-to-income ratio will go down and you may even get a nice bump in your credit score.