How Much Mortgage Can I Afford?

In light of the housing bubble and other financial disasters, it is understandable that, although homes now cost less, mortgages are just that much harder to attain. You’re probably in like white on rice if you have good credit though, so hit up CreditKarma to get your free credit score and make sure. If your credit isn’t so hot, you can improve your score before you actually apply for the mortgage.

Here are the things you need to take into account when you consider whether or not you will be able to afford your mortgage payment. I suggest leaving a ton of wiggle room around these figures. You never know what might happen, and the prices of nearly everything will likely keep rising year upon year.

So we’re going to look at how much mortgages can cost you, as well as how much income you have. These will all be kind of imaginary calculations for the sake of illustration, but you can apply the formulas to your own circumstances.

Your gross monthly income refers to what you bring in with your paycheck, pre-tax, and benefits and is one of the most important things that come into play when you are trying to get a mortgage. The next thing that lenders consider is debt, including the kinds of debt you have (car or student loans, and credit cards). Lenders will look at how long you will potentially be paying these down and consider if the mortgage payment is realistic in light of these obligations. Once a potential lender -like a bank- looks at your financials, they will decide whether or not they want to let you borrow their money. And they won’t let you if they don’t think you can pay it back, with interest.

The calculation used is the debt to income ratio or the income ratio, known as 28/36 in shorthand. Your monthly mortgage payment should be no higher than 28% of your gross income, and the monthly debt payments no more than 36% of your gross income. Lenders will look at your reasonable monthly payment amount on the mortgage and multiply that by how many months you would be paying it off.

Example:

A family has a Gross Income of $72,000 ($6000/ month). Their debts amount to $500/ month. They can make a down payment of $30,000 on a  $200,000 house.

Using the good old 28/36 rule, multiply the monthly income by .28, which equals $ 1680 (max mortgage payment), then add that to the current debt payment ($500), bringing us to $2180 total. Now, if this seems high, lenders and borrowers may want to consider extending the life of the mortgage to lower the payments per month, perhaps to 15 or 30 years.  However, at an interest rate of 4.25% (adding $92.65 per month to that $2180 and bringing the total to $2272.65/ month, this works out to $27, 271.80per year for 6 years (less the down payment.) You can also rework the calculations to pay lower amounts per month, keeping in kind other pay downs on debt and leaving room for unforeseen financial occurrences. You get it.

You can even get pre-approval to make sure you’d get the mortgage before you actually apply, so be sure to look into that when you start your calculations.

You can run the numbers and see how much you can afford.  But just remember, everything starts with your credit.  If you have good credit, your mortgages will invariably be lower because you will get lower rates.