Question 1

What is borrowing power and how is it calculated?

Accepted Answer

Borrowing power is the maximum amount of money a lender will allow you to borrow based on your financial situation. It's calculated using several factors: your income, existing debts, credit score, down payment, and the lender's debt-to-income ratio requirements. The calculator uses standard mortgage formulas to determine how much you can afford to borrow while maintaining manageable monthly payments.

Question 2

What is the 28/36 rule in mortgage lending?

Accepted Answer

The 28/36 rule is a common guideline used by lenders: 28% of your gross monthly income should go toward housing expenses (mortgage, taxes, insurance), and no more than 36% should go toward total debt payments (housing plus other debts like car loans, credit cards). This rule helps ensure borrowers can comfortably afford their mortgage payments and maintain financial stability.

Question 3

How does my credit score affect my borrowing power?

Accepted Answer

Your credit score significantly impacts your borrowing power in several ways: it determines the interest rate you qualify for, affects loan terms and conditions, and can influence the maximum debt-to-income ratio lenders will accept. Higher credit scores typically result in lower interest rates, which increases your borrowing power by reducing monthly payments.

Question 4

What is the difference between conventional and FHA loan requirements?

Accepted Answer

Conventional loans typically require a 20% down payment and have stricter debt-to-income ratios (usually 36% or less). FHA loans allow down payments as low as 3.5% and may accept higher debt-to-income ratios (up to 43% in some cases). However, FHA loans require mortgage insurance and may have higher overall costs despite lower down payment requirements.

Question 5

How do I improve my borrowing power?

Accepted Answer

To improve your borrowing power: increase your income, reduce existing debts, improve your credit score, save for a larger down payment, and consider a longer loan term. Paying off high-interest debts first can significantly improve your debt-to-income ratio. Also, avoid taking on new debt before applying for a mortgage.

Question 6

What is loan-to-value ratio and why does it matter?

Accepted Answer

Loan-to-value (LTV) ratio is the percentage of the property value that you're borrowing. For example, if you buy a $300,000 home with a $240,000 loan, your LTV is 80%. Lenders prefer lower LTV ratios because they reduce risk. Conventional loans typically require 80% LTV or less, while FHA loans may allow up to 96.5% LTV. Higher LTV ratios often require mortgage insurance.

Question 7

Can I use gift money for my down payment?

Accepted Answer

Yes, many lenders accept gift money for down payments, but there are specific requirements: the gift must come from an acceptable source (usually family members), you'll need a gift letter documenting the gift, and the donor may need to show the funds came from their own accounts. Some loan programs have restrictions on gift amounts and sources.

Question 8

How accurate are online borrowing power calculators?

Accepted Answer

Online calculators provide good estimates but may not reflect your exact borrowing power. Lenders consider additional factors like employment history, asset reserves, and specific loan program requirements. For the most accurate assessment, consult with a mortgage lender who can review your complete financial profile and current market conditions.

Borrowing Power Calculator

Income & Debt Information

Property & Loan Details

Your Borrowing Power

Debt-to-Income Ratio

Loan-to-Value Ratio

Total Borrowing Power

Affordability Analysis

Quick Example Result

How This Calculator Works

The Lending Framework

Income Analysis

Debt Assessment

Key Calculation Components

Maximum Loan Calculation

Affordability Metrics

Financial Formulas Used

Sources & References

Example Calculation

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Frequently Asked Questions

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