Question 1

How do lenders determine how much house you can afford?

Accepted Answer

Lenders evaluate your gross monthly income, existing debts, credit score, down payment, and the current interest rate. They calculate two key ratios: the front-end ratio (housing costs vs. income, typically capped at 28%) and the back-end ratio (all debts vs. income, typically capped at 36-43%). The maximum loan amount is the highest balance where your projected PITI payment stays within these ratios.

Question 2

What debt-to-income ratio do I need for an investment property?

Accepted Answer

Most lenders require a debt-to-income (DTI) ratio of 43-45% or lower for investment property loans, though some allow up to 50% with strong compensating factors. Unlike primary residence loans, lenders may count a portion of expected rental income (usually 75%) to offset the new mortgage payment. Keeping your DTI low gives you more borrowing capacity for additional investment properties.

Question 3

How does down payment size affect what you can afford?

Accepted Answer

A larger down payment increases your purchasing power in two ways: it reduces the loan amount needed (lowering monthly payments), and it may qualify you for better interest rates. For investment properties, a 25% down payment is common and can unlock more favorable loan terms. However, putting more money down reduces your cash-on-cash return, so investors must balance affordability with return on invested capital.

Question 4

What hidden costs should I include beyond the mortgage payment?

Accepted Answer

Beyond principal and interest, you should budget for property taxes, homeowners insurance, PMI (if under 20% down), HOA fees, maintenance (typically 1-2% of home value per year), vacancy costs for rentals, and utilities. For investment properties, also factor in property management fees (8-12% of rent), landlord insurance, and potential capital expenditure reserves. These costs can add 30-50% on top of the base mortgage payment.

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