Many borrowers apply for home loans while not understanding how lenders determine their “buying power”. The formula is quite simple. After analyzing a borrower’s credit history and down payment amount, a lender will look at the borrower’s ability to repay.

A lender will first look at a borrower’s monthly credit expenses. These will include the monthly payments for the new home loan, property taxes, insurance, car payments, credit card payments, student loan payments, etc… Once this number is totaled, it will be divided into the borrower’s monthly income. That percentage amount is what we call the total-debt-to-income ratio. Lenders would like to keep that ratio under 45% (some go lower, while some go higher).

Once that number is derived, the lender will back into the borrower’s buying power. To increase his or her buying power, they need to either increase their income or decrease their monthly bills. That is why sometimes a lender will approve a loan by requiring a certain debt (like a car payment) to be paid off first.

So the next time you apply for home loan, ask your lender to show you their calculations. Perhaps he or she missed something that could result in more buying power.