The first consideration in buying a home is comparing your dreams with reality. Put simply, how much house can you afford? Determining a ballpark figure for what you can afford is an important first step in finding your new home – 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 buy 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 decide on your down payment, it’s time to figure out how much you can afford to borrow. The best way to do that is to look at your monthly income to determine what mortgage payment you can afford.
Lenders look at your total debt when figuring out how much you can afford to borrow. After all, if you are carrying a large credit card debt, it’s going to be harder to pay your mortgage at the same time. For example, many lenders think your total debt payments including mortgage shouldn’t be 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 things to keep in mind when working with these ballpark figures:
- Your maximum monthly payment includes property taxes and homeowner’s insurance, not just your mortgage. You also may need to purchase mortgage insurance if you are making a down payment of 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.
Here is an easy to use Mortgage Calculator that can also help: