How Much House Can You Afford?
The first consideration in buying a home is comparing what you want, with what you need, and what you can afford. Determining a ballpark figure for your ideal purchase price is an important first step – it saves you time by ruling out homes that are out of reach, or too modest.
It’s a simple fact: The bigger your down payment, the less you need to borrow to purchase your home. Take a look at your assets – savings, stocks, bonds, the equity in your current home – and see what kind of down payment you can make. Remember, lenders prefer to have buyers put down at least 20 percent of the purchase price; if your down payment is less than that, your lender may require you to purchase mortgage insurance.
Once you determine your down payment, calculate the amount you can afford to borrow. Lenders evaluate your total debt when determining the loan you can afford. For example, if you are carrying a large credit card debt, it will be harder to also pay your mortgage. Many lenders cap your total debt payments including mortgage at no more than 36 percent of your income. The formula is a lot like that for mortgage ratios:
Monthly Gross Income x .36 = Maximum Debt Payments
Below is the calculation for our $4,000-a-month household with a monthly debt of $400:
$4,000 x .36 = $1,440 – $400 = $1040 Maximum Mortgage Payment
Two important factors to consider:
- Your maximum monthly payment includes property taxes and homeowner’s insurance, not just your mortgage. You may also need to purchase mortgage insurance if your down payment is less than 20 percent of the home’s price.
- The ratios may not fit your family. If you are saving for kids’ college expenses or a new car, for example, you’ll probably want to be more modest about how much you borrow.
If you need help calculating your maximum monthly payment, please contact me anytime.