How Much Mortgage Can I Afford?
A loose guideline is to take 3 times your gross annual income to calculate the maximum loan amount you can afford. EXAMPLE: Annual income 50k = home loan max of about 150k. Keep in mind, the amount of money you can borrow from a lender and what you can actually afford may be different amounts. Just because a lender qualifies for a high loan amount DOES NOT mean you need to buy a home for that amount. This is where many borrowers get into trouble! Don't think you have to spend it all... Why? Because lenders only consider your income and debts, not your monthly living costs when they calculate your loan amount. Keep in mind debt is only longer term revolving monthly bills like auto loans, student loans, credit card bills monthly medical bills etc...Where borrowers get into trouble is the lack of control over regular household expenses like, groceries, shopping, cable tv, entertainment, gas for the car. If you have an appetite for spending you may want to consider keeping your monthly payment below what a lender will qualify you for. So...where do you start? How about backing into our monthly mortgage amount and then calculate a TOTAL LOAN AMOUNT? Starting at 28% of your gross monthly income is a safe amount to spend on your monthly mortgage. This will cover the principal, interest, tax and insurance. So... you'll need to analyze 3 things: 1. Your monthly gross income 2. All monthly debts (car payment, student loan) 3. All other monthly spending ** other spending = other living expenses like groceries, gas, cable tv, entertainment etc... If your monthly gross income is $5000, you want to keep your mortgage payment (PITI) at around $1400 (28%). Keep firmly in mind that you need to pay tax and insurance (the TI part of PITI) so you SUBTRACT that amount out of your payment. Remember, house prices are listed for JUST the house...not inculding the tax and ins, so you'll need to build that in to your price calculation. If tax and insurance is $200 monthly then we have $1200 left to spend on principal and interest - When you find a house you like you run the price through a calculator like this Mortgage Calculator, and you'll get your monthly PI. (Choose what interest rate you think you qualify for and use a 30 year term.) What about monthly debts? Say you have a car payment of $250, a student loan of $180 and credit card bills of $100 every month as well? That's $530 every month! Our monthly mortgage and monthly debts cannot exceed 36% of our gross monthly income so...$1800-$530=$1270. Take out the monthly tax and insurance of $200 and were at a safe monthly payment of $1070. Now run this $1070 through this calculator to find the home price you can consider ( enter into the box that says " desired monthly payment" ) - Pre-Qualify Calculator Can you Afford it? Make sure you consider your other outside monthly spending before you commit - things like gas, utility bills, cable TV bills, groceries, going out to eat, vacations etc can eat away at your cash flow BIG TIME. These are the sneaky expenses that drive folks into foreclosure - so think that mortgagepayment through!
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How much can I borrow?How Much Mortgage Can I Afford?