How Much House Can You Afford
When you approach lenders about financing a mortgage, they will use two commonly accepted guidelines to help determine your ability to make mortgage payments. These guidelines are a starting point for evaluating your ability to make the payments on the proposed loan. Therefore, your lender will look at your individual financial situation to determine if more flexible guidelines are appropriate for you.
- Your monthly housing costs (including mortgage payments, property taxes, homeowner and mortgage insurance, and homeowner’s fees) should total no more than 28 percent of your monthly gross (before taxes) income. In addition to your regular pay, your income can include funds you receive from overtime work, a part-time job or second job; retirement, VA and Social Security benefits; disability; welfare and unemployment benefits; alimony; and child support.
- Your monthly housing costs plus other long-term debts such as payments on car loans, student loans, or other installment debt (debts with more than ten months left to repay) should total no more than 36 percent of your monthly gross income.
Let the numbers do the talking
An easy-to-use calculator will help you understand how much home you can afford, or if you would like to compare the monthly payments of an adjustable-rate mortgage to a fixed-rate mortgage. For a free calculator to help you crunch the numbers visit www.bankrate.com. Click on the "Calculators" tab. Then, under the heading "Mortgage Calculators", select the "How much home can I afford?" The site offers a large variety of mortgage-related calculators including those that will help you calculate mortgage payments, weight fixed vs. adjustable rates and determine whether it is more financially feasible for you to rent or buy. For the best estimate of what you can afford you will need the following information:
- Gross income (before taxes)
- Monthly debt (do not include debt that will be paid-off within the next six months)
- Funds available for down payment and closing costs
- Interest rate (the site offers links to help you determine average rates based upon zip code)
- Mortgage term (length of the mortgage)
- Down payment amount
- Estimated cost for homeowners insurance policy
- Estimated property taxes
In addition to mortgage-related calculators, the site offers free access to numerous financial calculators related to managing personal finances, retirement savings, credit card debt, personal savings and much more. These can all assist you in getting your finances in order which will in turn prepare for the loan qualification process ahead.