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How much can I borrow for a mortgage including deposit?

If you have made the decision to buy a home, then congratulations.

One of the first things you will need to decide is how much of loan you can afford for your house if you do not have a down payment or deposit. After you make some calculations based on your income, you will apply for a mortgage from the bank and it will make a decision about how much it is willing to finance for you based on your application.

How Much You Can Afford

Calculate your gross monthly income before taxes.

Then list your expenses, such as utilities, gas, food, etc., and subtract them from your take-home pay. Now you know how much money you have to play with each month.

Use an online mortgage calculator to test out how much your monthly mortgage payment will be with different interest rates and loan pay-off periods.

Decide how much your maximum mortgage loan can be using the calculator. Remember, a mortgage is going to cover the entire cost of the house, but you're going to need a realistic plan to start paying it all off. Figure that your monthly mortgage payments cannot be more than the money you have left after you pay expenses, and should be no more than 28 per cent of your gross monthly income.

What the Bank Wants to See

Once you have found a house you want that is in your price range, you are ready to get your loan.

The application process will require a verification of how much you can borrow. The bank will need the following items to process your application:

(a) Your Social Security number and previous address if you have lived at your current residence less than two years

(b) Proof of income (pay stubs, W-2s, rental agreements)

(b) Your current and last employer's contact information

(c) Proof of assets (car titles, bank statements)

(d) A list of your monthly expenses

(e) Credit check, which will show your credit score, credit history and all your current credit card debt and outstanding loans

(f) The estimated purchase price, property value and down payment amount if any

Bank Calculation Methods

The bank will look at all the information you have provided in your application to figure out your "debt-to-income" ratio (DTR). This is how much debt you have compared to how much money you make and how much your assets are worth. Lenders actually look at two different debt-to-ratio formulas --- front-end and back-end --- when deciding whether to approve you. Front-end DTR is how much mortgage-to-income you will have. The bank will not approve your loan application if your front-end DTR is above 28 per cent of your gross income.

Back-end DTR is how much overall debt-to-income you will have. This includes things like credit cards and car loans. The bank will not approve your loan if the back-end DTR goes above 36 per cent of your gross income.

Securing a Deposit or Down Payment

It is possible to buy a house with no deposit or money down. However, the amount of money you can put down will directly affect the total amount of money you qualify to borrow. Also, if you fail to put down at least 20 per cent, you will have to pay private mortgage insurance (PMI) each month until the loan has been about 80 per cent paid off. Because you probably will not be approved for a personal loan and a mortgage loan at the same time, you will need to consider some alternative funding sources if you want to include a deposit or down payment. Borrowing money from friends or family is a possibility. You can also tap your savings, retirement, or even your credit lines for cash.

Using a credit card is a bad idea, however, as the fees will cost you more than if you make no down payment at all. Or you can get your deposit the old-fashioned way: wait a little while and save up for it.