Your borrowing power is the maximum amount of credit you can access without putting your financial stability at risk. This number is based on a variety of factors, including your credit score and history. The higher your score, the larger borrowing capacity you have. A healthy credit score also means you’ll likely qualify for a lower interest rate when applying for a loan or mortgage. Knowing how much you can borrow is an important part of the homebuying process. Read on to find out more!
When you’re ready to start shopping for a home, it’s important to have an idea of your borrowing power and how to increase your borrowing capacity. This will help you narrow down your search and get the most out of your investment. So, how do you calculate your borrowing power?
There are a few different factors that go into calculating your borrowing power, including:
Your credit score
Your credit score is one of the most important factors in determining your home loan borrowing capacity. A higher score means you’re less of a risk to lenders, and as such, they’ll be more likely to lend you money. A healthy credit score is generally considered to be anything above 700.
Your credit history
Your credit history is another important factor in determining how much you can borrow for your home loan. Lenders will want to see a history of on-time payments and responsible borrowing behaviour. If you have a history of late payments or defaults, this will likely negatively impact your borrowing capacity.
Your current debt obligations
In addition to your credit score and history, lenders will also consider your current debt obligations when calculating your borrowing power. This includes things like outstanding student loans, car loans, and credit card debt. The more debt you have, the less borrowing power you’ll have.
Your income and employment history
Finally, lenders will also look at your income and employment history when determining your borrowing power. They’ll want to see that you have a steady source of income and a good employment record. If you’re self-employed.
Now that you know some of the factors that go into calculating your borrowing power, let’s take a look at how to actually calculate it.
There are a few different ways to calculate borrowing power. One popular method is to use a borrowing power calculator. These calculators take into account things like your credit score, income, and current debt obligations to give you an estimate of how much money you can borrow.
Another way to calculate your borrowing power is by using the 28/36 rule. This rule states that you should not spend more than 28% of your gross monthly income on housing expenses, and no more than 36% of your gross monthly income on all debt payments (housing and non-housing). So, if your gross monthly income is $5000, you should not spend more than $1400 on housing expenses and no more than $1800 on all debt payments.
While these methods can give you a good idea of your home loan borrowing power, the best way to get an accurate estimate is to speak to a mortgage broker. They’ll be able to take into account your specific situation and give you a more accurate estimate of how much money you can borrow.
Now that you know how to calculate your borrowing power, it’s time to start shopping for your new home! Keep in mind that your borrowing power is just one factor to consider when buying a home – you’ll also need to save for a down payment and closing costs. But knowing how much you can borrow can help you choose the right options when it comes to financing your new home.
If you’re not sure where to start, book a free consultation with our expert mortgage brokers. They can help you find the right lender and get the best interest rate on your mortgage that is suited to your situation.
Happy house hunting!