If you are in the market for a home loan, you may be wonder; how big of a mortgage can I afford? While there are no set in stone type of rules, there are some things that the bank will consider when deciding if they should approve your home loan. Likewise, there are plenty of things you should consider before you decide to borrow the money for a house. If you are wondering, how big of a mortgage can I afford, then you'll want to consider a few things, including how interest rates are determined.

Down payments:

If was wondering how big of a mortgage I could afford, I'd see what the going down payment rate is. Generally speaking, the banks will need 20% down, but there are plenty of options out there for those that don't have that type of money on hand. There are many first time homebuyer programs out there that will allow you to qualify for a lower interest rate, a smaller down payment requirement, and in some cases, a tax credit. Still, the general rule of thumb remains at 20%. If you are a first time homebuyer, you'll need to find a way to raise the money needed for a down payment, in most cases. When determining how big of a mortgage you can afford, you'll need to take down payment into consideration. Banks require a down payment because they have something called loan to value ratio, to help minimize their risk. Essentially, this means they will only loan out a certain amount of the home's actual value. Suddenly, the question, how big of a mortgage can I afford, just got a little harder to answer.

On the homebuyer's end, the amount of down payment will really impact how big of a mortgage you can afford. I would say it's one of the more important factors. An interest rate increase of just one or two tenths of one percent can mean thousands and thousands of dollars over the course of the loan. Those that are able to qualify for any type of homebuyer tax credit or reduced interest plan should take advantage of the savings.

How much debt do I have:

Banks will look at something called debt to income ratio when they review your home loan application. But hey, I know how big of a mortgage I can afford, why would the bank tell me what I can and cannot pay for? Well, the bank will need to make sure your monthly obligations can be met, along with the payment for your new house. Generally speaking, your projected house payment should not exceed 30% of your gross monthly income. For the bank's purposes, they consider property taxes, interest, mortgage insurance, dues and fees as a part of the total house payment. So, if your taxes would be $2,400 per year, it will add $200 per month to your payment. Just because you think you know how big of a mortgage you can afford doesn't mean the bank will agree. Ultimately, this is done to help reduce the amount of risk the bank will assume by extending you the credit.

For the consumer who is wondering, how big of a mortgage can I afford, it is always wise to take all costs into consideration. Just because the banks assumes you can pay up to 30% of your gross income to a home loan doesn't mean it's realistic. What are your other debts? Can you personally make those payments? If you feel you cannot, then go for a smaller amount than 30%. Always take insurance and taxes into consideration.

Interest rates:

The bank will run a credit check, just as they would with any other loan. Your credit score will impact the amount of interest you pay. As you can guess, the lower your credit score, the higher the interest rate. Basically, those with a low score are a greater risk, so the bank must get a higher rate to justify the increased risk. How big of a mortgage can I afford will depend on the rate you are likely to get.

If you really want to know how big of a mortgage you can afford, I would really recommend getting a copy of your credit report. In general, a score over 700 will get you decent interest rates. By getting your report, you will be able to look for inaccuracies and dispute them, giving your score a quick boost. Those with the best score have the lowest interest.

Crunch the numbers:

Sit down and make out a realistic budget when you wonder, how big of a mortgage can I afford? By having a realistic account of your monthly expenses you'll be able to know exactly what you can and cannot pay. Avoid the temptation to skew the numbers, and be realistic and fair to yourself. If you aren't accurate, you may end up purchasing a home you cannot make the payments on, forcing some tough times. Make sure this doesn't happen to you when you want to know how big of a mortgage you can afford.

The question, how big of a mortgage can I afford, will be much easier to answer once you actually crunch the numbers. Not only should you make a budget, you should also use a home loan calculator. There are tons of home loan calculators available to use free online. Play around with the home loan calculator using different loan amounts and interest rates. You should also see how your payments are impacted by adjusting the number of years for the loan. A home loan calculator is a great tool to use for anybody that's wondering, how big of a mortgage can I afford? Once you find the numbers, be sure to add in approximate cost of insurance and taxes, to make sure you aren't choosing a number that's too high.

As you can see the question, how big of a mortgage can I afford is tough to answer. You now have an idea what the bank is looking for and what they need to extend credit. But what does all of this mean to you?