How Much Can I Borrow? A Beginners Guide to Mortgages

Are you looking to buy your first home?

It’s likely that for your first home, you’re going to need to take out a mortgage to pay for it. There are different sizes, and it’s not always the best idea to take out the highest amount a lender offers. But if you’re new to mortgages, you likely won’t know how much you can borrow, or how the mortgage process works.

Don’t worry, we can help! Keep reading for our guide on mortgages to answer the question “how much can I borrow?” and more.

How Do Mortgages Work?

Your mortgage will become another one of your monthly payments. Usually, the mortgage is repaid over 15-30 years. But you can pay it down faster if you offer a larger down payment.

Your down payment is the percentage of the loan that you’re paying upfront. For a first time buyer, this is usually between 3% and 20% of the total price of the property.

In part, the percentage you have to pay comes down to the type of mortgage you select. But regardless of type, the higher the down payment the less you will owe on the loan. This means lower repayments and less time to pay it off.

No matter the down payment amount though, your repayment amount should stay the same. But, bear in mind a lot of that payment goes towards interest. How much actually goes to your principal (the loan amount before interest) will change as time goes on.

This is amortization, and in the early days, it’ll skew more to paying for the interest. As time goes on though, that percentage shifts more towards the principal. More of this gets paid down each month.

The last point to bear in mind is a mortgage counts as a secured loan. This means you need to put up an asset as collateral damage. In the case of mortgages, the home is that asset. If you can’t make your payments anymore, the lender can repossess your house. This is the foreclosure process.

How Much Can I Borrow?

You shouldn’t focus on what size mortgage you can get, but rather what size repayment you can afford. This is why you need to know your budget before you start looking for properties.

Most lenders will approve mortgage payments of up to 35% of your total, pre-tax, monthly income. But, most financial advisors would say to cap this at 28%, or at a push 32%.

You need to make sure your budget leaves enough room for unexpected costs. So this percentage should include property tax, insurance, fees, etc.).

You also need to consider any existing debt you have. Total monthly debt repayments shouldn’t be more than 40% of your total monthly income. This includes your mortgage, student loans, car loans, credit cards, etc.

Then, there are interest rates and how much of a down payment you can afford to give. To give you a rough starting idea, it’s a good idea to use a mortgage calculator. This will give you a starting figure of what you could afford so you find out what properties fit that budget.

What Different Types of Mortgage Loans Are There?

At first, the different types of mortgage loans can seem daunting. But you can categorize them into these groups:

  • Conventional/government-backed
  • Fixed or adjustable-rate
  • Conforming or nonconforming

But, be aware that these categories can overlap. To make things more simple, let’s look at the most common types of mortgage on the market.

15-30 Year Fixed Rate Mortgage

Across all mortgages, there will be interest to pay and most loans fall under the 15-30 year fixed rate loans. This type of mortgage fixes your rate for the duration of the loan. It won’t adjust (up or down) depending on the housing market like an adjustable-rate mortgage (ARM).

Sometimes you might hear them called a “15 year fixed rate conventional loan” for example. This means they’re not insured by an agency of the government. These are the most popular type of mortgages.

Jumbo Loans

When it comes to conventional loans, there are two types: conforming and non-conforming. Nonconforming loans don’t meet standards set by FHFA (Federal Housing Finance Agency). Nor the standards set by Fannie Mae and/or Freddie Mac.

A type of non-conforming mortgage is a jumbo loan. This is because they can provide the applicant with more money than the FHFA standards allow. If you need a big chunk of money, then jumbo loans can be a good option.

But, to offset the higher risk, there are usually higher interest rates to bear in mind. There will be strict eligibility requirements to meet too. You’ll need an impeccable credit score and a high income.

FHA Loans

An FHA loan is a government-insured loan by the FHA (Federal Housing Administration). They make buying a home possible for people who don’t qualify for a conventional loan.

They’re also nonconforming, as they don’t adhere to the standards mentioned above. They’re also not in the conventional category, due to their government agency backing.

For example, to get a conventional loan you will likely need a credit score of 620 or more. For an FHA, you only need 580, sometimes even a score of as low as 500 is enough. Also, instead of a conventional down payment of 10%, it’s only 3.5%. For first time buyers with a moderate income, they’re a common option.

How Do I Get a Mortgage Offer?

The first step you take is getting pre-approval. While mortgage calculators are a good start to work out your price range, you should talk with a lender. They will tell you what price range you qualify for and what you can borrow.

With pre-approval, you can house hunt. Although you can find your house first, having pre-approval sets you apart from others. It shows you’re a serious contender and likely to get a mortgage and complete the sale.

When you make an offer, the lender steps in again and verifies all your information. It also vets the home to make sure it’s something they will cover with a mortgage.

If no issues get discovered, you’ll get approval and can close the sale. At this stage, you pay your down payment and closing fees, then sign the paperwork like your mortgage note.

Getting a Mortgage: Know What You’re Signing Up For

So, there you have it! Now you know the answer to “how much can I borrow” you know the next steps to take.

Start with your budget and get your monthly expenses in order to buy a house or do some other work. Pay down debts, improve your credit score and use a mortgage calculator. Having a starting idea of what you can afford will put you in a better position. And never accept an offer for an amount that you can’t comfortable repay each month.

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