Two general rules of thumb:
1. lenders are comfortable with a ratio of up to 36%. A ratio greater than this will be perceived as a higher risk and either you will be denied a loan or pay a higher mortgage rate to cover the increased risk.
2. No more than 28% of your gross monthly income should be spent on housing expenses

After your debt-to-income ration, the next major facor in determining how much you can borrow is how good your credit rating is. In order to get the current prime interest rate and hence lowest monthly mortgage payments, you need to have a high credit score (approximately over 750). Higher interest rates can have a big impact on how much financing you can afford to borrow. Use this mortgage calculator  to calculate mortgage payments formula. You can add in your personal financce numbers to get an estimate of how much you might be able to borrow.


Better to be preapproved than prequalified.
Getting prequalified by a broker or lender is an informal process where a broker asks you some simple questions regarding your debts, assets and credit score and comes up with a ballpark loan maximum for you.
However, when getting preapproved for a mortgage, you must fill out a loan application and provide the required supporting documentation. Assuming you qualify for a mortgage, the mortgage broker will commit to you in writing the amount you can borrow and give you a preapproval letter.

If you see a home and want to purchase it, (assuming it passes appraisal by the bank), then you are free to buy that home. Preapproval for a home loan has a number of advantages:

• You will know where you stand financially and, if necessary, what improvements you have to make to get the financing you really want.
• Most realtors will only work with buyers who have been preapproved. By getting preapproved, you are demonstrating you are serious about looking for a home.
• You will know exactly how much you can afford and can base your home search on that value.
• If you are competing with other buyers in a competitive seller's market and you are the only who has bothered to get preapproved, you will have an advantage. 

Mortgages explained?
A mortgage is an agreement between you and your lender that you will repay the money they loaned you to acquire the property. The loan will be paid over a set number of years (amoritization schedule)at a certain interest rate. You are using the home as collateral for the loan and the lender places a lien on the property until the loan is paid off or you sell the property.

Many of the mortgages of just very recently are no longer with us. And that is probably a good thing! Gone are the NINJA's (No Income No Job and no Assets) or "liar loans" where the borrower just stated their income without providing any supporting documentation.

The summers of lending love have passed and with it reality and sanity have returned. Lending requirements are a lot stricter these days and unfortunately will prevent many people from getting their foot in the door. Having said that, if you do qualify for a mortgage today then you are probably less likely to get into financial problems since the lender will have screened you to the max.

Click here for description of the critical elements of a mortgage.


Applying for a mortgage
If you are a first time buyer, it is highly advisable to work with a mortgage broker or lender who is willing to sit down with you in person for an hour or so. They should explain the mortgage process, the various factors determining the amount you can borrow, as well as what your mortgage options are. If the broker is not willing to spend time with you, then you may be better off looking elsewhere.

When a lender makes a decision about a mortgage application, they consider two basic factors:
1. your ability to repay the loan
2. your willingness to repay the loan. 

Ability to repay the mortgage is determined by verifying your current employment and analyzing your total income. Lenders prefer for you to have been employed at the same place for at least two years, or at least be in the same line of work for a few years. Your potential monthly mortgage payments will be compared to your current monthly gross income and your monthly credit payments to see how much you can afford.

The lender will gauge your willingness to pay the loan based on your credit report and previous commitment to paying rent, utility bills and previous loans.

Lenders look at each applicant on a case by base basis. They may allow some flexibility in determining your risk factors. For example, if you are slightly below requirements in one aspect, they might still allow you to qualify becuase you compensated with, for example, larger down payment or more solid overall financial health.


Return to Buyer's step 1.  Is buying right for me?


Continue to Buyer's step 3.  My dream home