A house is one of the biggest investments you will ever make. Unfortunately, many people do not have enough savings to buy a home out of pocket. Thankfully, several lenders offer mortgages to those who qualify. If you’re thinking of taking a mortgage, figuring out how much you can borrow is a crucial step in the process of buying your home.
A good start will be examining your income from your job, investments, and other sources of money and weighing it against your expenses like student loans, car payments, debt, etc. Lenders are usually happy when you borrow a large amount of money since it means more interest. That is why it is essential to calculate the amount you will repay over the loan’s life before taking it.
How Much Can You Borrow?
The amount you can borrow depends on your income. Usually, UK lenders allow one to borrow between 3 to 4 times their income. But you can borrow more if you are getting the loan with someone else, like your spouse.
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It is best to use a mortgage checker for estimating affordability. Once you figure out how much you can vs. how much you spend, list your total down payment, then input this information in the mortgage calculator to get a clue of your home purchasing budget. Please be sure of the money you spend monthly as it is a big factor in determining the amount you can reasonably spend in buying a house.
How Much Mortgage Payment Can You Afford?
One thing you need to consider before taking any loan is the amount you can comfortably spend while still living on the loan. For instance, if you can afford to spend ?5000 monthly for mortgage repayment, and you only remain with ?500 to spend on your monthly expenses, you are likely stretching your budget. Remember, a loan should not deplete you of all your finances. So, just because a lender offers a large sum doesn’t mean you take the offer. Plus you should avoid loan overpayment by limiting yourself to what you can afford.
Also, note that remortgages are possible if you want to save money or clear your debt. If you opt for this route, consider remortgaging at the end of your mortgage product to avoid being charged an early repayment charge.
What Impacts How Much You Can Afford?
The terms of your mortgage and your existing expenses influence your housing budget. For this reason, it is wise to shop around different lenders to find one that offers the best rates. Besides these two, here are other things influencing how much loan amount you will get:
Current Mortgage Rates
Financial bodies raise loan interest over the years to try and reduce inflation. That means high mortgage rates. When the rates are high, many homebuyers lose enthusiasm about buying homes, which reduces the cost of owning a home. But if you are still searching for a loan, high interests mean steeper monthly payments on your mortgage.
Lenders look at your credit score when determining the mortgage amount to offer you. Someone with a high credit score often gets more money and less interest. But if your credit score is low, you will be offered a low amount and charged high interest.
Debt to Income Ratio (DTI)
Your DTI represents your monthly income from all your sources of money vs. your monthly expenses. Lenders also examine your DTI to assess how risky it is to lend you. If your DTI is high, the lender will doubt your ability to repay the amount. Every lender has the maximum DTI placed on a particular loan. It is a good idea to shrink this ratio before applying for a mortgage.
Your down payment is a crucial component of affordability. The higher it is, the lower the loan-to-value ratio is. So, lenders will not consider you as risky as someone paying a lower down payment.
Can You Get a Mortgage If You Are Self-Employed?
Yes. Only that you will jump through several hoops than an employed person. But we advise using a mortgage calculator to check your affordability before applying. With a mortgage calculator, you can link to your calculation with the results, making it easier to see the estimations. It is also wise to speak to a mortgage broker to help determine suitable lenders.
Lastly, gather two or more complete tax years of tax returns and business accounts. Some lenders will ask that a chartered accountant sign these documents to prove the reliability of the information. How much you’ll be offered will depend on your net profit.