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How Many Times My Salary Can I Borrow For A Mortgage

Report looks at mortgage debt to income ratio

Lenders will typically use an income multiple of 4-4.5 times salary per person.

For example, if you earn £30,000 a year, you may be able to borrow anywhere between £120,000 and £135,000.

However, lenders will sometimes offer a mortgage that is 5 times your salary. So if you earn £40,000, you may be able to borrow up to £200,000.

Meanwhile Nationwide Building Society, the biggest mortgage lender in the UK, recently announced that it would lend up to 5.5 times income to first-time buyers with a 5% deposit.

Other lenders may also be willing to advance money at this salary multiple to higher earners. Barclays, for example, will lend up to 5.5 times income to applicants with a salary of at least £75,000 a year.

If part of your income is made up of bonuses, commission or overtime, this will make it more difficult to know exactly how much you can borrow. The decision on whether additional earnings on top of a basic salary will be counted depends on individual lenders.

NatWest, for example, will take the average of the past two years of a guaranteed bonus. If your bonus is discretionary , NatWest will calculate the average but only include 50% of that when adding it to your regular income.

Mortgage borrowing calculator

How much you can borrow will vary between different lenders, and it is not always clear why some are willing to lend more than others.

To search for the best mortgage deals, try our free mortgage comparison tool below.

How Much Of Your Income Should You Spend On A Mortgage

The amount can spell the difference between living comfortably and struggling financially

One of the most important things to consider when buying a house is how much mortgage you can reasonably afford to pay off. This is because knowing how much you can allocate to your monthly repayments very often spells the difference between living comfortably and struggling to make ends meet.

Expert opinion varies on the exact amount, but the consensus is you should have enough left over to meet other financial obligations after making a home loan payment. So, what percentage of your monthly income should you dedicate to your mortgage? Lets take a closer look.

Are You Struggling To Get A Mortgage As A First

Boost your mortgage budget with the help of your family without needing a cash gift.

Even with the 5% deposit scheme, most first-time buyers struggle to afford the value of an average property in the UK with their deposit savings and income, simply due to the disproportionate rise of house prices compared to wages since the 1990s.

And while many first time buyers turn to their parents for help with a deposit, many families dont have the cash on hand to gift to them, with their wealth tied up in their property or their pension.

But there are other ways that your parents could help with your mortgage.

  • Deposit Booster

We can use the equity your family member has accumulated in their property to get you a bigger deposit for your first house purchase without downsizing their home, drawing from their pension, or selling other assets to raise funds.

Or, we can use their annual income on your mortgage application in a joint borrower, sole proprietor mortgage . This means they can add their income to yours without needing to be named on the property deed or securing the mortgage against their own home.

Expatriates: whats the most significant expat residential mortgage I can get for my salary?

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How Do Lenders Determine Mortgage Loan Amounts

While each mortgage lender maintains its own criteria for affordability, your ability to purchase a home will always depend mainly on the following factors.

Many different factors go into the mortgage lenders decision on homebuyer affordability, but they boil down to income, debt, assets, and liabilities. A lender wants to know how much income an applicant makes, how many demands there are on that income, and the potential for both in the futurein short, anything that could jeopardize its ability to get paid back.

Income, down payment, and monthly expenses are generally base qualifiers for financing, while and score determine the rate of interest on the financing itself.

Get A Better Interest Rate

Why are UK house prices so high?

The interest rate a lender offers you affects your monthly mortgage payment amount. If you nab a lower rate, youll make a lower monthly payment. Your chances of getting a better interest rate might increase in a few different scenarios:

Average Interest Rates Are Low

Average mortgage interest rates vary substantially from year to year, and have at times varied by as much as 2% within a mere six-month period.

Getting a fixed-rate mortgage at a time when interest rates are low can keep your monthly payments low.

Read more:Mortgage Rates Briefly Explained

Your Credit Score Increases

One surefire way to score a better interest rate is to improve your credit score. If you havent applied for a mortgage yet and your score has room for improvement, it might be worthwhile to wait six months or so for your credit score to climb up before you go for the mortgage.

If you already have a mortgage and your credit score has improved significantly since you originally took out the loan, you might be able to refinance for a better rate.

Read more:How Much Does a 1% Difference in Your Mortgage Rate Matter?

You Shop Around

There are oodles of options out there for mortgage lenders. Signing with your historical bank might give you the comfort and trust of familiarity, but it wont necessarily give you the lowest rate you can find.

Always compare your banks offer with competing banks, credit unions, and reputable online lenders.

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Borrow Up To 6 Times Your Salary With A Low Mortgage Rate

In the example above, were assuming you are offered a mortgage rate of 3.125%, which, nationwide, is a reasonable expectation for a highly creditworthy borrower at the time of writing.

But check out how the borrowers budget changes as mortgage rates rise and fall:

Salary
$2,700 $2,700

*Home buying budgets estimated using The Mortgage Reports’mortgage calculator. Calculation assumes the borrower has $300 in existing monthly debts

Assuming relatively low debts $300 per month and a 3.0% mortgage rate, this person might be able to borrow up to $564,000 for a mortgage. .

Thats nearly six times their salary.

But suppose the borrower has credit issues, and only qualifies with a higher mortgage rate of 4.5%.

Suddenly, the maximum amount they can borrow on their salary drops to $471,000, or 4.7 times their salary. The higher mortgage rate has reduced their home buying budget by about $100K.

Luckily, rates are at historic lows right now, so buyers at every level are able to maximize their budgets.

What Factors Help Determine ‘how Much House Can I Afford’

Key factors in calculating affordability are 1) your monthly income 2) cash reserves to cover your down payment and closing costs 3) your monthly expenses 4) your credit profile.

  • Income Money that you receive on a regular basis, such as your salary or income from investments. Your income helps establish a baseline for what you can afford to pay every month.

  • Cash reserves This is the amount of money you have available to make a down payment and cover closing costs. You can use your savings, investments or other sources.

  • Debt and expenses Monthly obligations you may have, such as credit cards, car payments, student loans, groceries, utilities, insurance, etc.

  • Credit profile Your credit score and the amount of debt you owe influence a lenders view of you as a borrower. Those factors will help determine how much money you can borrow and the mortgage interest rate youll earn.

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How To Determine How Much House You Can Afford

Most people use a mortgage to buy a home, but everyoneâs income and expenses are different. Because of this, youâll want to calculate your potential monthly payment based on your current financial situation. Youâll need to calculate some figures like:

  • Income: This is how much you earn on a monthly basis from your regular day job and any side hustles you have. Make sure you have gross and net numbers at the ready. You can find these on your most recent pay stub. If you have a fluctuating income, use your most recent tax returns for guidance.
  • Debt: Debt consists of what you currently owe money on. This would include things like credit cards, student loans, car loans, personal loans and other types of debt. Debt isnât the same as expenses, which might fluctuate month-to-month .
  • Down payment: This is how much cash youâll pay up-front for the cost of a home. A 20% down payment might remove private mortgage insurance charges from your monthly costs, but itâs not always required to buy a home. The higher your down payment, however, the lower your monthly mortgage payment will be.
  • : Having good or excellent credit means you can get the lowest interest rate available offered by lenders. A high interest rate typically means a higher monthly payment.

The Qualified Mortgage Debt Ratio Rules

Mortgage Debt-to-Income Ratio (What Is a GOOD DTI? How to calculate DTI?)

Regardless of the loan program you choose, most lenders follow the Qualified Mortgage Debt Ratio rules. The QM rules began after the housing crisis to keep lenders more accountable and borrowers choosing smarter loans.

According to the Qualified Mortgage Guidelines, your total debt ratio cannot exceed 43%. This means all of your debts cannot take up more than 43% of your gross monthly income. Some lenders work around this rule and dont worry about offering Qualified Mortgages, but these lenders are few and far between. Most lenders want to make sure you can afford the loan beyond a reasonable doubt in order to avoid foreclosure.

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The Monthly Income Rule

If you want to focus your search even more, take the time to think about your monthly spending. While the Consumer Financial Protection Bureau reports that banks will qualify mortgage amounts that are up to 43% of a borrower’s monthly income, you might not want to take on that much debt.

“You want to make sure that your monthly mortgage is no more than 28% of your gross monthly income,” says Reyes.

So if you bring home $5,000 per month , your monthly mortgage payment should be no more than $1,400.

“With a general budget, you want to have 50% of your income going toward utilities, mortgage and other essentials,” says Reyes. Keeping your mortgage payment under 30% of your income ensures you have plenty of room for the rest of your needs.

How Do Lenders Work Out How Much I Can Afford

If youre looking to buy a new home, you may well be wondering how much you could borrow for a mortgage.

The mortgage amount, added to your deposit, will determine the maximum property price you can afford.

When you apply, your chosen lender will conduct an affordability check to calculate how much they can lend you. This involves examining your income and outgoings the more money you spend each month, the less you might be able to borrow.

As part of their affordability assessment, lenders will consider criteria such as your:

  • Employment status
  • Total gross income
  • Childcare costs

Traditionally, they would also calculate whether you would still be able to afford your mortgage if interest rates climbed to 3%.

If you are wondering, what kind of mortgage could I get?, check out our guide to the different types of mortgage.

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Tips For Getting A Mortgage

  • If you cant get a mortgage for the amount you want, you may need to lower your sights for now. But that doesnt mean you cant have that dream home someday. To realize your housing hopes, consider hiring a financial advisor who can help you plan and invest for the future. SmartAssets free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If youre ready to find an advisor who can help you achieve your financial goals, get started now.
  • The debt-to-income ratio is just one of several metrics that mortgage lenders consider. They also look at your credit score. If your score is less-than-stellar, you can work on raising it over time. One way is always to pay your bills on time. Another is to make small purchases on your credit card and pay them off right away.

How Much Can I Borrow For A Mortgage

Average Mortgage: Average Mortgage Debt To Income Ratio

The amount of money you can borrow depends on a number of factors:

  • The deposit youâve saved
  • The amount that you earn
  • Future changes which might affect your earnings, such as redundancy, having a baby or switchingjobs

There are several mortgage calculators available onlinewhich will let you see at a glance how much you could potentially borrow.

You can also work out how much deposit youâll need if youhavenât started saving yet â or if youâve found a property and you want to know if you have enoughdeposit to get a good deal on a mortgage.

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Oh Perfect That Was Easy Off To Go Take Out A Mortgage Now Bye

Woah, slow down! Were just getting started here. Remember? We said this was supposed to be painful, laborious and even depressing. Lets continue:

There are two things that you need to consider when figuring out the answer to how much mortgage can I afford. First, theres how much debt you are willing to take on and the second is how much debt a lender is willing to extend to you. The former is definitely important but the latter is what were going to discuss here.

So we are trying to determine how much your lender thinks you can afford. After all, theyre the one taking the risk by loaning you the money. Theyre going to be very concerned about your job, how much money you make in a year, how much money you can put down up front, your credit score and more.

Your lender is going to take all your information and come up with two figures to guide them: your back-end ratio and your front-end ratio.

How Affordability Assessments Work

When deciding how much to lend you, a mortgage provider will do an affordability assessment. Essentially, this means looking at the amount you typically earn in a month compared with how much you spend.

Lenders are also interested in the types of things you spend your money on. Some expenses can be quickly cut back, while others are less flexible – a gym membership, for example, may be easy to cancel whereas childcare costs are likely to be fixed.

Your lender will ask about things such as:

Income

  • Regular income from paid work
  • Any benefits that you receive
  • Income from other sources
  • Debt repayments such as student loan or credit card bills
  • Regular bills such as gas and electricity
  • Transport costs
  • Spending on leisure activities

The lender will also compare what you say with recent bank statements and wage slips. See our ‘Applying for a mortgage‘ guide for more detail on the documents you’ll need for an application.

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Conforming Loans Vs Non

Conforming loanshave maximum loan amounts that are set by the government and conform to other rules set by Fannie Mae or Freddie Mac, the companies that provide backing for conforming loans. A non-conforming loan is less standardized with eligibility and pricing varying widely by lender. Non-conforming loans are not limited to the size limit of conforming loans, like a jumbo loan, or the guidelines like government-backed loans, although lenders will have their own criteria.

What Is A Debt

Understanding Mortgage Debt to Income Ratios | It’s Not Rocket Science

Your debt-to-income ratio is all your monthly debt payments divided by your gross monthly income. This number is one way lenders measure your ability to manage the monthly payments to repay the money you plan to borrow.

Different loan products and lenders will have different DTI limits. To calculate your DTI, you add up all your monthly debt payments and divide them by your gross monthly income. Your gross monthly income is generally the amount of money you have earned before your taxes and other deductions are taken out. For example, if you pay $1500 a month for your mortgage and another $100 a month for an auto loan and $400 a month for the rest of your debts, your monthly debt payments are $2,000. If your gross monthly income is $6,000, then your debt-to-income ratio is 33 percent.

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How To Calculate A Down Payment Amount

The down payment is the amount that the buyer can afford to pay out-of-pocket for the residence, using cash or liquid assets. Lenders typically demand a down payment of at least 20% of a homes purchase price, but many let buyers purchase a home with significantly smaller percentages. Obviously, the more you can put down, the less financing youll need, and the better you look to the bank.

For example, if a prospective homebuyer can afford to pay 10% on a $100,000 home, the down payment is $10,000, which means the homeowner must finance $90,000.

Besides the amount of financing, lenders also want to know the number of years for which the mortgage loan is needed. A short-term mortgage has higher monthly payments but is likely less expensive over the duration of the loan.

Homebuyers need to come up with a 20% down payment to avoid paying private mortgage insurance.

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