When someone asks, “What price range are you looking in?” the answer isn’t always as simple as choosing a number. If you’re financing your purchase, your available price range can depend on your income, monthly debts, credit profile, down payment, loan program, interest rate, property taxes, insurance, and other costs. A lender pre-approval is the best way to see how those pieces come together for your particular situation, but understanding the basics can help you see which factors may strengthen — or limit — your purchasing power.
DEBT-TO-INCOME RATIO
Your debt-to-income ratio, or DTI, compares your monthly debt obligations with your gross monthly income. Lenders use it as one measure of how comfortably your income may support the mortgage payment along with your existing debts.
There isn’t one DTI limit that applies to every borrower or every mortgage. Different loan programs, lenders, credit profiles, and other factors can result in different allowable ratios. That’s why a lender can give you a much more useful answer than relying on a general percentage found online.
Monthly obligations that may be considered can include:
- Car payments
- Student loans
- Credit card minimum payments
- Certain child support or alimony obligations
- Personal loans
- Other installment or recurring debt obligations
WHAT ABOUT EVERYDAY LIVING EXPENSES?
Groceries, utilities, transportation, phone service, insurance, childcare, subscriptions, and other normal expenses may not all appear in the DTI calculation the same way reportable debt does. But they still matter to you.
A lender may tell you the maximum payment you qualify for. That doesn’t necessarily mean it’s the payment you’ll feel comfortable making every month. Before deciding how much house to buy, consider the rest of the life that payment needs to leave room for.
INCOME
Lenders generally look for income that can be documented and reasonably expected to continue. Depending on your circumstances and the loan program, qualifying income may include:
- Employment income
- Self-employment or freelance income
- Eligible commissions, bonuses, overtime, or tips
- Certain child support or alimony income when the borrower chooses to use it and it meets applicable requirements
- Retirement, pension, or annuity income
- Eligible Social Security or disability income
The documentation required will depend on the type of income. Pay statements, W-2s, tax returns, bank records, benefit statements, or other documentation may be used depending on the situation. Self-employed, commissioned, variable, or newly established income can require additional review.
CREDIT
Your credit profile can influence both whether you qualify and the loan terms available to you. Lenders may consider factors such as payment history, balances, credit utilization, account history, recent inquiries, and the type and number of accounts you have.
There is no single credit-score cutoff that applies to every mortgage or lender. Some programs may permit lower scores while others require stronger credit, and individual lenders can apply additional standards. You can learn more in Does Your Credit Score Give You the Best Mortgage Options?
LOAN-TO-VALUE (LTV)
Loan-to-value compares the amount you’re borrowing with the property’s value. For example, borrowing $360,000 on a property valued at $400,000 creates a 90% LTV.
LTV can affect loan eligibility, pricing, mortgage insurance, and other loan requirements. The rules vary by program, so a lender can explain how your planned down payment and loan amount affect your particular options.
DOWN PAYMENT
A larger down payment reduces the amount you need to borrow and lowers the LTV. That can improve your financing options in some situations and reduce the monthly principal-and-interest payment.
But 20% is not a universal requirement. Some conventional loan programs allow much smaller down payments, and FHA, VA, USDA, state, local, and other programs may provide different options for eligible borrowers.
Before putting every available dollar into the down payment, also think about closing costs, reserves, repairs, furnishings, and the emergency savings you’ll want after you receive the keys.
INTEREST RATE, TAXES, INSURANCE & HOA COSTS
Purchase power can change even when your income and debts don’t. A different mortgage rate changes the monthly payment associated with the same loan amount. Property taxes, homeowner’s insurance, mortgage insurance, and HOA dues can also affect the total housing payment your lender uses when evaluating the loan.
That means two homes with the same purchase price may not have the same monthly cost — or give you exactly the same purchasing power.
SO HOW CAN YOU IMPROVE YOUR PURCHASE POWER?
Depending on your situation, possibilities may include paying down certain debts, improving your credit profile, increasing the down payment, documenting additional qualifying income, choosing a different loan program, or adjusting the price range you’re considering. But the best move depends on the numbers.
An online affordability calculator can give you a rough starting point. A mortgage professional can go much further by reviewing your actual income, debts, credit, funds available for closing, and loan options.
If you’d like, I can recommend knowledgeable mortgage professionals who can help you determine not simply the maximum amount you may qualify to borrow, but a price range that makes sense for the way you want to live after you buy the home.