How Much Can I Borrow? (Math Behind Loan Approvals)

When you ask, “How much can I borrow?”, you might think the answer depends entirely on your credit score. You might assume that a 700 score unlocks a specific dollar amount, like a video game level.

In reality, your credit score determines the interest rate you pay. It is your income and existing debt that determine how much money a bank will actually hand you.

Lenders use a specific formula called the Debt-to-Income Ratio (DTI) to calculate your borrowing limit. Whether you are looking for a mortgage, a personal loan, or a car loan, understanding this one number will tell you exactly where you stand before you even apply.

The Magic Formula: Debt-to-Income (DTI) Ratio

Your DTI ratio is the percentage of your monthly gross income (before taxes) that goes toward paying debts.

The Formula: Total Monthly Debt Payments ÷ Gross Monthly Income = DTI %

Lenders generally follow these hard limits:

• 36% or lower: The “Gold Standard” for approval.
• 43%: The typical maximum limit for most “Qualified Mortgages.”
• 50%: The absolute danger zone. Most lenders will deny any new loan if your total debt exceeds half your income.

Scenario 1: How Much Can I Borrow for a Home Loan? (Mortgage)

Mortgage lenders use the strictest math, known as the 28/36 Rule.

1. Front-End Ratio (28%): Your new house payment (Principal, Interest, Taxes, Insurance, and HOA) cannot exceed 28% of your gross monthly income.
2. Back-End Ratio (36%): Your total debt (House + Cars + Credit Cards + Student Loans) cannot exceed 36% of your gross monthly income.

The Calculation Example

• Annual Income: $72,000 ($6,000/month)
• Existing Debt: $400 (Car loan) + $100 (Credit cards) = $500/month.

The Math:

• Max Total Debt Allowed (36%): $2,160
• Minus Existing Debt: -$500
• Max Mortgage Payment Allowed: $1,660/month

Even if you have an 800 credit score, the bank will not lend you more than a payment of $1,660/month. You can use a mortgage calculator to work backward from this monthly payment to find the total loan amount based on current interest rates.

How Much Can I Borrow calculator

Scenario 2: How Much Can I Borrow for a Personal Loan?

Personal loans are "unsecured" (backed by no collateral), so lenders are more cautious about your income stability but slightly more flexible on DTI.

• The Cap: Most lenders cap personal loans at 40% to 50% DTI.
• The Multiplier: Lenders often limit the total loan amount to a percentage of your annual income—typically roughly 20% to 30%.
  • Example: If you make $50,000 a year, it is very difficult to get approved for a $40,000 personal loan, regardless of your score. A $10,000 to $15,000 limit is more realistic.

Scenario 3: How Much Can I Borrow With a 700 Credit Score?

This is a common misconception. A 700 credit score does not guarantee you a $300,000 loan.

• Credit Score = Trust: It tells the bank if they should lend to you.
• Income = Capacity: It tells the bank how much you can afford.

However, a 700 score increases your borrowing power indirectly. Because a 700+ score qualifies you for a lower interest rate, your monthly payment is lower for the same loan amount.

• Borrower A (640 Score): 7% Rate on $300k = $1,995/mo. (Might be denied due to high DTI).
• Borrower B (740 Score): 6% Rate on $300k = $1,798/mo. (Might be approved because the payment fits the DTI limit).

Visualizing Borrowing Power

Imagine your income is a pie.

1. Taxes eat ~25%.
2. Living Expenses (Food, Utilities) eat ~30%.
3. Existing Debt eats ~10%.
4. The Slice Left Over: This is your borrowing power.

If you try to borrow a loan where the monthly payment is bigger than that leftover slice, the math fails, and the loan is denied.

Frequently Asked Questions (FAQ)

Does high rent hurt how much I can borrow?

For mortgages, no—because the new loan replaces your rent. But for personal loans or car loans, yes. Some lenders ask for your "Housing Payment" amount. If 50% of your income goes to rent, they may see you as "house poor" and limit your loan size to prevent default.

Can I include my spouse's income to borrow more?

Only if they are a co-borrower on the loan. If you apply jointly, the lender considers both incomes and both debts. This usually doubles your borrowing power, provided your spouse doesn't have excessive debt of their own.

What is the maximum DTI for an FHA loan?

FHA loans are more lenient. While they prefer 43%, you can sometimes get approved with a DTI as high as 57% if you have "compensating factors" like cash reserves or a high credit score.

How do I use a mortgage calculator to find my max limit?

Do not just enter the home price. Instead, calculate 36% of your gross monthly income, subtract your monthly debt payments (cars/cards), and enter that result as the "Monthly Payment" in the calculator. That will tell you the true loan size you can afford.