When thinking about buying a home, one important piece to consider before any other is what is your borrowing power. Said another way, this means how much house you can afford. This is important for a number of reasons; you do not want to look at houses which are out of your price range, you also do not want to limit yourself if you can afford more than you realize, and you do not want to wait until it is too late to fix a potential problem with your debt ratios.

The first two reasons for understanding your borrowing power are rather self explanatory, but that third one is a little trickier. Debt ratios are, ultimately, what determine your buying power. So if your debt to income ratio is too high, you will not be able to get a mortgage. Your debt to income ratio is determined by factoring all of your debt and the new mortgage together and comparing it against all of your sources of income. And while this seems like an easy enough calculation, it can become quite difficult in certain situations.

For instance, if you have a number of credit cards with outstanding debts, you might pay $200 on each card, totaling $1000 a month. But if you consolidated those debts into 1 line of credit, the aggregate monthly payment may now be $500, virtually cutting the obligation in half. You will ultimately owe the same amount, but this change could drastically impact your borrowing power.

Similarly, if you have multiple income sources, it is important to understand how each income source will impact your debt to income ratios. Some may count 100% toward the income, others at a different percentage, and still others may not count at all.

So while an online mortgage calculator might be helpful in determining your borrowing power, it is ultimately important to discuss your situation with a qualified mortgage professional. Otherwise, you might be looking at houses based upon the wrong facts.

If you have any questions about what your borrowing power is, please contact me and I will help you get an accurate number. And if you have anything to add about calculating your borrowing power, please leave a comment.