How Much Can You Borrow?
How do banks decide how much money to lend you in California? They base their decision on their estimate of your ability to repay the loan.
To make this estimate, they look at your income, your available cash, your debt, your credit history and your Loan To Value.
Riverside County’s updated lending limits for FHA will also play a key factor in determining the type of program and how much you can borrow. The new limits in Riverside County for a Single Family Residence is now $500,000.
Banks look at a few things when qualifying a borrower for a new mortgage:
There are two debt-to-income ratios that banks check based on the information you provide on your loan application.
Front-End Ratio
First, they check to see how much of your income would go toward the mortgage payment. This is called the front-end ratio.
Their guideline is that your total payment, including principal, interest, and escrow payments, should not be more than 31% of your gross (pre-tax) monthly salary; however lenders do go beyond this figure with compensating factors like additional assets or an elevated credit score.
To calculate this for yourself, take your annual salary and multiply it by .31, then divide it by 12. This number is your maximum total mortgage payment per month.
Back-End Ratio
Banks also check how much of your gross income is required to pay all of your debts combined. This is called your back-end ratio and includes the mortgage as well as car payments, credit card payments, student loans, and child support and alimony payments.
Their guideline for this ratio is that your total debt payments should not be more than 43% of your gross income; however, I’ve seen this figure reach as high as 55% again with compensating factors.
To calculate this for yourself, take your annual salary and multiply it by .43, then divide it by 12. This is the maximum allowable amount of your total monthly debt payments.
Don’t Be House Poor
Be cautious with these numbers however. Just because the bank says they are willing to lend you a certain amount, doesn’t mean you need to borrow that amount!
Instead, consider your own budget and lifestyle, and make sure you don’t end up with such a high mortgage payment that you can’t put money away for retirement, go for a nice vacation, or even go out to eat.
Some debt counselors recommend that your total payment should not be more than 31% of your net pay (after taxes), leaving you money for a comfortable lifestyle as well as the other costs of home ownership, such as repairs, maintenance, and higher utility bills.
Credit
The most obvious measure of a borrower’s credit standing is the score, which can range between 300 and 850. While there are several mortgage programs with different credit guidelines, having a 620 or greater will increase your chances of getting approved.
There is other criteria that banks look at regarding a borrower’s credit standing, such as payment history, total balances and limits, type of credit borrowed, and recent inquiries.
Loan-to-Value
The (LTV) is calculated differently depending on whether the new transaction is a purchase, refinance, or rehab loan.
Basically, it is the amount of the new loan in comparison to the total value of the property.
When qualifying for a Las Vegas FHA loan on a purchase, a 3.5% down payment would equal a 96.5% LTV.
Keep in mind that banks will verify a paper-trail of the assets used for the down payment, so it is important to communicate with your loan officer about your current financial position.
There are a few factors to consider when deciding on the amount of your new mortgage:
1. Desired Down Payment
2. Budgeted Monthly Payment
3. Length of time you want to own the property
Since California Mortgage Rates also influence your monthly payment, it is important to pay attention to the market.
Schedule a strategy session with a California Mortgage Expert by phone or at our office to discuss the best lending solution for you and your family.
Top 5 California Mortgage Links / Articles / Questions
- California First-Time Home Buyer Frequently Asked Questions
- California Mortgage – How Much Can I Borrow?
- What Are The Current Mortgage Interest Rates?
- Applying For A California Mortgage – What Documentation Do I Need?
- How Does The Mortgage Approval and Funding Process Work?
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Fairfield CA 94534
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