The amount you can borrow on a home mortgage depends upon several factors: the amount of cash you have for a down payment, your credit score, and your documented income. The current interest rate will also affect the amount you can borrow, because a lower fixed interest rate will usually mean a lower monthly payment for a higher loan amount.

Amount of down payment

According to Fannie Mae, a "down payment of 20 percent of the home purchase price demonstrates your commitment to long-term homeownership and provides you with immediate equity in a new home." Following this guideline and assuming you qualify for a conventional loan, to purchase a $400,000 home, you could borrow $320,000 for a mortgage with an $80,000 down payment. Some lenders will finance a conventional loan with 10 percent down; using the same $400,000 purchase price, a $40,000 down payment would mean borrowing $360,000. Another program through the Federal Housing Authority (FHA) requires a minimum of 3.5 percent down, or $14,000, with a mortgage amount of $386,000 available to borrow. The higher the mortgage amount, the higher your monthly payment will be: using the above examples and a 5 percent interest rate, the difference in payments would be approximately $1,717 for 20 percent down, $1,932 for 10 percent down, or $2,072 for 3.5 percent down, not including taxes or insurance.

Your Credit Score

To maximize the amount of money you can borrow on a mortgage, be sure your credit score is as high as possible. According to the Department of Housing and Urban Development (HUD), banks "decide whether to lend you money and what interest rates you will pay based on your credit score." HUD advises potential borrowers to remember the future effects of today's financial decisions.

Your Income and Current Debts

In addition to your credit score, lenders will carefully consider your income and current debts to be sure you will be able to afford your mortgage payment. They will calculate your debt-to-income ratio by adding all of your monthly payments and dividing by your monthly gross income and determine whether it fits their guidelines. According to the Department of Financial Institutions (DFI), some lenders will not allow borrowers to exceed a 35 percent ratio, while other programs, such as FHA, may allow higher ratios. DFI adds that many lenders will allow higher ratios for those with higher incomes. The amount of money you can borrow on a mortgage is directly linked to your total gross monthly income and the amount of monthly expenses to which you are already committed.

Source:

Federal Housing Authority

Fannie Mae

HUD: Home Economics

Resource:

Mortgage Calculator

Department of Financial Institutions