As a real estate buyer, are you waiting for your lender or mortgage broker to tell you whether you’re capable of obtaining a mortgage? If so, you should know that you can calculate how much you can afford to borrow on your own.

Knowledge is power, and knowing “how much I can borrow” now is important not only in the home buying process, but the information can help you avoid default and foreclosure later on.

How Much Can I Borrow for a Home?

Consider the following when you investigate taking out a mortgage:

1. Down Payment: You need to understand whether you can afford to take out the amount you plan to borrow. Before you take out a loan, you need to find out whether you can afford to make the down payment. Most lenders in today’s market require borrowers to make down payments of approximately 20% of a home’s purchase price. Federal Housing Administration (FHA) lenders may offer more flexible terms as it relates to down payment requirements – if you apply for an FHA loan, then you should expect a down payment of at least 3.5% of the home’s sale price. However, you need to meet the eligibility criteria to get an FHA loan.

2. Calculate your monthly income: When you plan to take out a mortgage to buy a home, take an honest look at your income. Your monthly salary, in conjunction with your monthly expenses (don’t forget about annual expenses like car insurance), are the starting points to determine your total monthly income. You need to include your monthly salary, money you get from investments and other sources of income. Try to analyze your budget to understand the amount you owe – deduct total debt expenses from your monthly salary to get your total monthly income figure.

3. Evaluate your credit score: You can analyze your credit score in order to know whether you can get the loan on favorable terms. If your credit report is blemished, then you may not be able to take out the loan, or, at a desirable low interest rate. Investigate and correct any incorrect entries on your credit report, and start early, working through the credit bureaus to correct misinformation on a credit report can take significant lead time.

4. Lower your debt to income ratio: Consider lowering your debt to income ratio in order to get the loan on affordable terms. It is easier to decide how much you can afford when you’re aware of the total amount you owe and your income. If your debt exceeds your income, then you can decide whether you can afford to borrow money.

How to Avoid Debt & Mortgage Debt Relief

Keep the above mentioned points in mind when you need to decide the amount you can afford to borrow when attempting to buy your new home. With an understanding of your income situation, and efforts to correct any misinformation on a credit report, you can have your eyes wide open going into a mortgage in knowing how much you can afford as well as avoiding default due borrowing more than you can afford.