It is crucial for a homebuyer to understand how much you can borrow when you applying for a loan. This question is one of the biggest on every potential homebuyer’s mind. The answer will determine where you will look for homes, what you can offer, and how much you’ll have to save.
We’ve put together an overview of how mortgage lenders determine how much you can borrow for a home loan in California.
When you apply for a home loan, the bank or mortgage company will ask two things:
- What is your monthly income?
- How much is your monthly payment for any recurring debts?
These two numbers are used to calculate your “debt-to-income ratio” or DTI. This is a significant factor in determining how much you’ll be able to borrow. The lender wants to ensure the borrower doesn’t take on too much debt with respect to their income. These ratios have been frequently studied to assess the amount of risk associated with the loan amount.
Debt-to-Income Ratio & Loan Types
Lenders use a debt-to-income (DTI) ratio to determine how much income a borrower needs to fund their purchase or qualify for financing. Most lenders recommend that borrowers stay within a 45% – 50% DTI limit.
The 45% – 50% guideline is not set in stone. DTI requirements also vary based on the loan types that borrowers use to finance their home purchase.
The main question is, will taking on a mortgage loan put the borrower into financial distress? Lenders use tools like the DTI ratio to ensure that borrowers will not be in trouble financially and to determine how much you can borrow for a home loan.
Another factor in how much you can borrow is loan limits. Each major financing program has specific limits, including FHA, VA, and conventional loans. The limits vary by county because they are dependent on median home prices. Areas like the San Francisco Bay Area have higher costs of living and more expensive housing costs; because of this the loan limit for these counties (San Francisco, Alameda County, Contra Costa County) is $765,600 as of 2020, which is far higher than the national average home price of $256,663.
Last but not least, your credit score also plays a part in how much you can borrow. In general, a higher credit score shows a lender that you are a responsible borrower and low risk.
On the contrary, a low credit score can indicate a missed payment in the past and which can be considered more of a risk to the lender. As a result, it will be easier for a lender to let you take out a more substantial loan if your credit score is high.