How much can I borrow?
Before applying for a mortgage or personal loan, one of the most important questions to answer is: how much can I actually borrow? Lenders do not hand out money based on wishful thinking — they assess your financial situation through a standardised measure called the debt-to-income ratio (DTI). This ratio compares your monthly debt obligations to your gross monthly income, and it directly determines the size of the loan you will qualify for. Getting a realistic figure before you approach a bank puts you in a far stronger negotiating position and saves you from the disappointment of falling in love with a home that is outside your reach.
DTI guidelines vary by country and lender. In France, banks traditionally cap the total monthly debt burden at 35% of net income — a rule enforced by the Haut Conseil de Stabilité Financière since 2021. In the United States, conventional loans typically allow a back-end DTI of up to 36%, while FHA-insured loans can stretch to 43% under certain conditions. In the United Kingdom, lenders usually apply income multiples of 4 to 4.5 times annual salary, but DTI analysis is becoming increasingly common. Understanding the threshold that applies to you is the essential first step in calculating your borrowing capacity.
How does the borrowing capacity calculation work?
The calculation is straightforward once you know your three key inputs. Lenders combine these figures to determine the maximum monthly payment you can afford, and then use current interest rates and your desired loan term to reverse-engineer the maximum loan principal. The result gives you a realistic ceiling before you start house-hunting or applying for credit.
- Monthly net income: Your take-home pay after taxes and social contributions. Some lenders use gross income, particularly in the US, so it is worth clarifying which figure your bank uses. Include any stable secondary income such as rental income or regular bonuses that you can document reliably.
- Existing monthly debt payments: The total of all recurring debt obligations you currently pay each month — car loans, student loans, credit card minimum payments, personal loans, or any existing mortgage. Do not confuse this with living expenses like rent, groceries, or utilities; only contractual debt repayments count.
- Target DTI ratio: The maximum percentage of your income that you and your lender are willing to allocate to total debt payments. A common starting point is 35% in France or 36% for conventional US loans. You can be more conservative — 28–30% — to leave room for life's surprises.
The formula for your available monthly payment is: available payment = income × DTI ratio – existing monthly debts. Once you know this figure, you can feed it into a standard loan payment formula alongside your expected interest rate and loan term to find the maximum principal you can borrow. For example, using the annuity formula: Principal = available payment × [(1 – (1 + r/12)^(-n)) / (r/12)], where r is the annual interest rate and n is the total number of monthly payments.
Worked example: Sarah's borrowing capacity
Sarah earns $4,800 per month net after tax. She currently has a car loan costing her $350 per month. She is thinking about applying for a mortgage and wants to know her realistic ceiling before booking viewings. She decides to apply a 35% DTI ratio, which is standard at her local bank.
Step one — available monthly payment: $4,800 × 0.35 = $1,680. She then subtracts her existing car loan: $1,680 – $350 = $1,330 available for a new mortgage payment.
Step two — maximum loan principal: With a 6.5% annual interest rate over a 25-year term (300 months), the monthly rate r/12 = 0.005417. Applying the annuity formula: Principal = $1,330 × [(1 – (1.005417)^(-300)) / 0.005417] ≈ $175,000 borrowing capacity.
If Sarah could reduce her car loan or increase her income, her ceiling rises significantly. Paying off the car loan entirely would free up that $350, giving her an available payment of $1,680 and a borrowing capacity closer to $222,000 at the same rate and term. This example highlights why clearing smaller debts before applying for a large loan can dramatically improve your mortgage offer.
Frequently asked questions about borrowing capacity
Does the DTI limit apply to net or gross income?
It depends on your country and lender. French banks apply the 35% cap to net income (after tax and social charges). US lenders generally use gross income (before tax) for DTI calculations under conventional and FHA guidelines. Always confirm which definition your bank uses, as it can shift your limit by several thousand dollars.
Does a larger down payment increase how much I can borrow?
A larger down payment does not directly increase your DTI-based borrowing limit, but it reduces the loan amount you need, which lowers your required monthly payment and improves your approval chances. It can also unlock better interest rates, reducing the total cost of the loan. Some lenders also require less stringent DTI ratios when the loan-to-value (LTV) ratio is lower.
How does my credit score affect how much I can borrow?
Your credit score influences the interest rate you are offered, which in turn affects the maximum principal at a given monthly payment. A higher credit score means a lower rate, meaning each dollar of monthly payment can service more debt. Additionally, lenders may apply stricter DTI caps or require larger deposits for borrowers with poor credit histories.
Are stress tests included in borrowing capacity calculations?
Yes, most lenders now apply a stress test — they calculate whether you could still afford the repayments if interest rates were to rise by 2–3 percentage points above the current rate. In the UK, the Bank of England's stress test rules mean your assessed repayment capacity is based on a rate significantly above what you will actually pay at the start. This can reduce your headline borrowing figure compared to a simple DTI calculation.
Can I borrow more by applying with a co-borrower?
Yes. When two borrowers apply jointly, lenders typically combine both incomes, which raises the DTI ceiling proportionally. However, they also combine both parties' debts. The net effect is almost always positive if the co-borrower has a stable income and minimal existing debt. Joint applications are very common for mortgage purchases involving couples.
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