What determines your mortgage size

A lender will offer you a mortgage based on your income, debts, credit score, and down payment—not on what you want to borrow or what a house costs. The lender uses a formula called a debt-to-income ratio (DTI) to decide the maximum monthly payment you can handle. Most lenders cap your total monthly debt payments (including the new mortgage) at 43% of your gross monthly income, though some will go to 50% if your credit is strong and your down payment is large.

The actual dollar amount you can borrow depends on the interest rate at the time you apply. A lower rate means a lower monthly payment on the same loan size, so you can borrow more. A higher rate means you can borrow less. Interest rates change daily, so the mortgage size a lender offers you today may be different from what they offer next week.

Your down payment also sets a ceiling. If you have $50,000 saved and a lender says you can borrow $300,000, you can only get a $350,000 house (down payment plus loan). You cannot borrow more than the home's purchase price, and most lenders require you to put down at least 3% to 5% of the price.

Key Takeaways

  • Lenders use your debt-to-income ratio to set a maximum monthly payment, typically capping total debt at 43% of your gross monthly income.
  • The dollar amount you can borrow depends on the interest rate at the time you apply, which changes daily and directly affects how much house that payment can buy.
  • Your down payment is a hard limit—you cannot borrow more than the home price minus what you have saved.
  • A pre-qualification letter from a lender tells you the range they will offer, but it is not a may provide and does not lock in a rate.

How lenders calculate your maximum payment

Start with your gross monthly income—the amount you earn before taxes and deductions. Multiply that by 0.43. That is the maximum total monthly debt payment a lender will usually allow. Subtract your existing monthly debts: car loans, student loans, credit cards (use the minimum payment, not the balance), personal loans, and child support. What remains is the maximum monthly payment for your mortgage, property taxes, homeowners insurance, and mortgage insurance (if your down payment is under 20%).

Example: You earn $5,000 gross per month. 43% of that is $2,150. You have a car payment of $350 and student loans of $200, totaling $550 in existing debt. Your maximum housing payment is $2,150 − $550 = $1,600 per month. That $1,600 must cover the mortgage principal and interest, property taxes, insurance, and mortgage insurance if you have it.

Some lenders use a stricter front-end ratio instead, capping just the mortgage payment (without taxes and insurance) at 28% of gross income. If you have high existing debts, this 28% rule may limit you more than the 43% rule. A lender will use whichever is lower.

How interest rates affect the loan size

The interest rate you receive determines how much of your monthly payment goes toward principal versus interest. A higher rate means more of each payment is interest, so less principal is borrowed. A lower rate means more of each payment is principal, so more can be borrowed.

If your maximum monthly payment is $1,600 and the interest rate is 6%, you can borrow roughly $266,000 (on a 30-year loan). If the rate drops to 5%, the same $1,600 payment lets you borrow roughly $305,000. If the rate rises to 7%, you can only borrow roughly $233,000. The difference between a 5% and 7% rate is about $72,000 in borrowing power—on the same monthly payment.

Rates are set by the market and your lender's pricing, not by you. You cannot negotiate the rate down, but you can shop multiple lenders to find the best one. Rates also depend on the loan type (conventional, FHA, VA, USDA), the loan term (15-year or 30-year), and your credit score. A higher credit score usually earns you a lower rate.

The role of your credit score and down payment

Your credit score affects both the interest rate you receive and the down payment percentage a lender requires. A score of 740 or higher typically qualifies for the best rates and the lowest down payment (3% to 5%). A score between 620 and 739 may may have access to for conventional loans but at a higher rate and with a larger down payment (5% to 10%). A score below 620 usually disqualifies you from conventional loans, though FHA loans (which allow scores as low as 500) are an option.

A larger down payment increases your borrowing power in two ways. First, it reduces the loan size relative to the home price, which lowers your risk in the lender's eyes and may earn you a better rate. Second, if you put down 20% or more, you avoid mortgage insurance, which frees up monthly payment room for a larger loan.

If you have a 3% down payment and a 650 credit score, a lender may offer you less than if you had a 10% down payment and a 750 score, even if your income and debts are identical. The lender is pricing in the higher risk.

Pre-qualification versus pre-approval

A pre-qualification is an informal estimate. You tell a lender your income, debts, and credit score (or they pull a soft credit check), and they tell you a rough range of what you might borrow. It takes minutes and carries no weight. It is useful for knowing whether to look at $300,000 houses or $500,000 houses, but it is not a promise.

A pre-approval is a formal commitment. The lender pulls your credit report, verifies your income with recent pay stubs or tax returns, and confirms your debts. They then issue a letter stating the maximum loan amount they will lend you, the interest rate (locked for 30 to 120 days depending on the lender), and the conditions. A pre-approval letter is what you show a seller to prove you can close.

Pre-approval does not lock you into that lender. You can shop other lenders and get multiple pre-approvals. Each hard credit pull (which pre-approval requires) temporarily lowers your score by a few points, but multiple pulls within 14 to 45 days (depending on the credit bureau) count as a single inquiry, so shopping around does not significantly harm you.

What happens if you want to borrow more than the formula allows

If the debt-to-income formula limits you to a $300,000 loan but you want $400,000, you have a few options. The most direct is to increase your income. A higher salary or a co-borrower with income both raise the numerator in the DTI calculation, which raises your maximum payment. Some lenders count overtime, bonuses, or side income if you can document it for two years.

You can also reduce your existing debts. Paying off a car loan or credit card before you apply frees up monthly payment room. Paying down student loans helps too, though federal student loans in income-driven repayment plans may count as $0 per month if you document the plan, which can improve your ratio without actually paying them off.

A larger down payment does not increase your borrowing power under the DTI rule—it only increases the total home price you can afford. But it does reduce the loan size, which may make the monthly payment fit within your DTI limit if you are close to the edge.

Loan limits set by loan type

Conventional loans (not backed by a government agency) have no federal maximum, but individual lenders set their own caps, usually between $500,000 and $1,000,000 depending on the lender and your profile. FHA loans have a federal cap that varies by county; in most areas it is between $400,000 and $800,000. VA loans (for military members and veterans) have no federal cap on the loan amount, but the VA charges a funding fee based on the loan size and your down payment. USDA loans (for rural properties) also have no federal cap but are limited to properties in may be able to access rural areas.

If you are buying in a high-cost area and need to borrow more than the conventional limit, a jumbo loan is an option. Jumbo loans exceed the conventional cap (usually $766,550 in 2024, though this changes yearly) and typically require a larger down payment (10% to 20%), a higher credit score (700+), and a lower DTI ratio (often 36% instead of 43%).

Frequently Asked Questions

Can I borrow more if I have a co-signer?

Yes. A co-signer's income counts toward your DTI calculation, which raises your maximum payment. The co-signer's debts also count, so if they have high existing debt, they may not help much. A co-signer is legally liable for the loan if you do not pay, so lenders take this seriously and verify the co-signer's finances just as thoroughly as yours.

What if my income is irregular or seasonal?

Lenders typically average your income over the past two years. If you are self-employed or work on commission, bring two years of tax returns and recent profit-and-loss statements. Some lenders average the last two years; others use the most recent year only. Ask the lender upfront which method they use, as it can change your approved amount.

Does the loan amount change if I lock in an interest rate?

No. Locking a rate freezes the interest rate for a set period (usually 30 to 60 days), but it does not change the loan amount the lender approved. The rate lock protects you if rates rise during that time. If rates fall, you may be able to float down to the lower rate, depending on the lender's policy.

What if I get a raise after pre-approval?

Tell your lender. If you have documentation of the raise (a new offer letter or recent pay stub), they may increase your approved loan amount. This is especially useful if you are close to the top of your budget and a small increase in income would let you borrow more.

Can I borrow less than the lender offers?

Yes. The lender's offer is a maximum, not a requirement. You can borrow any amount up to that maximum. Borrowing less means a lower monthly payment and less interest paid over the life of the loan, but it also means a lower home price you can afford (unless you have a larger down payment).