Buying a home is a major milestone in anyone's life, and one of the most important questions that first home buyers have is how much they can borrow. The answer to this question depends on several factors, including the buyer's income, credit score, and the price of the property they want to purchase.
Let's explore these top three factors First Home Buyer need to consider in more detail, and provide some insights into how much first-time buyers can typically borrow.
1. Income
The first and most important factor that lenders consider when deciding how much a first-time buyer can borrow is their income. Lenders want to make sure that the borrower has enough income to make their mortgage payments each month. Typically, lenders will look at the borrower's gross income, which is their income before taxes and other deductions are taken out. The general rule of thumb is that a borrower's mortgage payment should not exceed 28% of their gross income. For example, if a borrower has a gross income of $60,000 per year, their mortgage payment should not exceed $1,400 per month.
2. Credit Score
Another important factor that lenders consider when determining how much a first-time buyer can borrow is their credit score. A credit score is a number that represents a borrower's creditworthiness. A higher credit score generally means that the borrower is more likely to make their payments on time and is less likely to default on their loan. Lenders typically use a borrower's FICO score, which ranges from 300 to 850, with a higher score indicating better creditworthiness. The higher the borrower's credit score, the more they may be able to borrow.
3. Property Price
Finally, the price of the property that a first-time buyer wants to purchase is another important factor in determining how much they can borrow. Lenders want to make sure that the property is worth the amount that they are lending. In general, lenders will use an appraisal to determine the value of the property. They will typically lend up to 80% of the appraised value of the property. For example, if the appraised value of a property is $200,000, a lender may be willing to lend up to $160,000.
Lenders will typically consider all of these factors when making a decision about how much to lend.
For example, let's say that a first-time buyer has a gross income of $60,000 per year, a credit score of 700, and wants to purchase a property that is appraised at $200,000. Based on these factors, the buyer may be able to borrow up to 80% of the appraised value of the property, which is $160,000. However, their mortgage payment should not exceed 28% of their gross income, which is $1,400 per month. Based on current interest rates and loan terms, the buyer may be able to qualify for a mortgage with a monthly payment of $1,200, which would allow them to borrow up to $160,000.
If you are a first-time buyer, it is important to understand these factors and to work with a reputable mortgage broker who can help you determine how much you can afford to borrow.
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