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Home Mortgage Loans - How Much Can You Borrow?

There are several factors that determine how much you can borrow on a home mortgage. Your income and existing debts, along with your credit rating, are key components to determining your eligibility for securing a home mortgage loan. The lender will also factor into the equation how much, if any, deposit or down payment you have saved for this purchase.

The lender will calculate your debt to income ratio. This tells them how much of your total monthly income you currently use to pay off your existing debts and how much is left. Basically, if a lot of your income is used to pay off pre-existing debts, then you won't have much left over to pay off the home mortgage loan. The result is you either won't get approved for the mortgage or you might get approved for a much smaller amount than you had applied for.

To borrow enough money for a home mortgage loan you definitely need a good income, or preferably two incomes, very little existing debt and at least some deposit or down payment. No deposit or down payment will mean that the interest rate charged will be higher.

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(In Canada, an insurance fee will be added to the mortgage through Canada Mortgage And Housing Corporation (CMHC). That insurance fee ranges from 1.50% to 3% and is added to the mortgage total. Do not be misled into thinking this insurance premium is for your benefit. It is charged to you, but it is simply a guarantee of repayment for the lender.)

The most common debt to income ratio used by the lenders is 33/38. This means your housing costs should take no more than 33% of your total income and adding the rest of your existing debt should bring it up to no more than 38% of your total income. These are flexible guidelines depending on the amount of down payment you have and the lender's discretion. Some lenders may even allow a 29/41 ratio to qualify for a loan.

So basically, how much you can borrow on a home mortgage loan will depend on your debt to income ratio, (Access our debt to income ratio calculator here.) your down payment and your credit history. You may find it easy to figure out what your income is per month, but if you are paid with a bonus or commission system as well as a wage, then it is a little more difficult.

Lenders only calculate your income based on what you've earned in the past, not what you are earning now. If you get bonuses at work, you will need the records of your bonuses from the last two years. You can work it out by looking at your W2 forms for the last two years. Add them up, divide the total by 24 and the answer will be your total monthly income.

If you are self-employed, your income your income will still be calculated using tax records from the last two or three years. If you work it out yourself before you apply for a mortgage, you will be a step ahead of the lender and know what to expect when they ask questions.


   Understanding the home mortgage application process will help you get the best mortgage deal.

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