How Much of a House Can I Qualify for?

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Article summary: Mortgage approval and affordability are two different things. You need to determine your financial comfort-zone (affordability) on your own. The lender cannot do this for you. Once you've done that, you can apply for a loan to find out how much you qualify for with your income.

Reader question: "How do I figure out how much house I can qualify for when applying for a home loan, based on my income?"

This is one of the most common questions we received here at the Home Buying Institute, and it comes in many forms. How much house can I afford to buy? How much of a mortgage loan can I get? The wording varies, but the question itself is always the same. Here's the answer.

There's only one way to find out how much of a house you can qualify for, and that is to apply for a home loan through a lender. But in reality, your research should begin long before you submit a mortgage application. You need to establish a home-buying budget for yourself before you even start talking to lenders.

So there are really two questions here, and it's important to make the distinction between them:

  • Question #1 - How much can I afford to spend each month on a mortgage payment?
  • Question #2 - How much is the lender willing to give me in the form of a mortgage loan?

These are two different things entirely, and if you understand this difference you'll be in a better position financially.

Many first-time home buyers make the mistake of lumping these two questions and concepts together. They think it's the lender's job to tell them how much they can afford to spend each month. But this is a dangerous and false notion. If you trust a mortgage lender to tell you how much of that house you can afford, you could end up buying too much house for your income level. It happens all the time, as indicated by the rate of foreclosures in the United States.

Here's the most important lesson to take away from this article. A lender can only tell you how much you qualify to borrow, but they cannot tell you how much you can actually afford to pay each month. These are two different numbers, and you need to have one of them on paper before you even start talking to mortgage companies.

How Much Can You Afford to Pay Each Month?

Let's talk about the first question out of the two I've listed above. How much are you able to spend each month toward a mortgage payment? You need to figure this out before you start applying for home loans and shopping for houses.

To do that, you would subtract your monthly expenses from your net monthly income. The number you have left over is not necessarily your mortgage payment -- paying that full amount would leave you cash-strapped and house poor. But the number left over does help you determine how much you can afford to spend on a house each month. Here's an article that explains how to do that in more detail.

The video below explains how to create a housing budget, based on your debts and income. This simple strategy works for all borrowers, but you'll have to tailor the list of expenses. You might have some monthly expenses that are not mentioned in the video. Alternately, the video might discuss certain expenses that you don't have. The strategy is what's most important. Tailor it as needed.

Once you've established a home-buying budget like we talked about in the previous paragraph, you are in a much better position to apply for a home loan. When you have a monthly spending limit in mind, you'll know if a certain house exceeds that limit.

Skipping this step is what gets a lot of people in trouble. Many of the homeowners who get foreclosed on each year skipped this all-important step. They put too much faith in the lender. But the lender is not your financial advisor.

Getting the Lender to Qualify You

So now you've established a monthly spending limit for yourself. This is a smart place to start, and it will certainly get you off on the right foot. So what's next? Now you are ready to talk to lenders and find out how much house you qualify for, based on their underwriting guidelines.

When you apply for a home loan, the lender is going to review your credit score, your income level, the current amount of debt you are carrying, and several other financial factors. Based on this review process, they will tell you how much house you can qualify for -- or, more specifically, how much of a mortgage loan you can get.

But it's important that you go into the second stage with the first number in mind already. In other words, you must set a budget first and apply for mortgages second. I firmly believe that if every home buyer in the country did things in this order, the foreclosure rate would be half of what it is now.

This article answers the question: How much house can I qualify for based on my income? If you have already set a budget for yourself, and you are ready to move on to the next stage in the process, we recommend getting mortgage quotes online. You can get started from this section of our website.

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Good luck with your home-buying process!