When you’re in the market to buy a house, you probably want to know how much house you can afford. It makes sense—you don’t want to overspend on your mortgage, and if you can’t afford it, you can’t buy it.
Luckily, figuring out how much mortgage you can afford isn’t that difficult. This comprehensive guide will explain the process of calculating your monthly mortgage payment and show you what to look out for along the way. And once you have that number, it’s easy to see how much house you can really afford!
Use The 28% Rule to Help Determine A Down Payment
The 28% rule is a great way to help you determine how much of your income should go toward your mortgage. A general rule of thumb is that you can afford to spend up to 28% of your monthly income on housing expenses including mortgage, taxes and insurance.
So if you make $480,000 annually this means that you can afford around $143,600 in monthly housing costs including principal and interest (28% of $480,000).
However this number can vary based on the details such as location.
Calculate Debt to Income Ratios
To calculate your debt to income ratio and see how much mortgage you can afford, divide your total monthly debt (including your mortgage) by your gross monthly income.
Therefore, if you have $2,000 in debt and make $5,000 per month as salary: 2/$5=$400/month or 25% of your take-home pay. However, with this high an amount of debt it is recommended that you get at least 10% more than the minimum requirement for your DTI ratio.
Therefore, with this high an amount of debt it is recommended that you get at least 30% more than the minimum requirement for your DTI ratio.
Take Advantage of All Government Programs
Knowing what programs are available to you can help determine how much mortgage you can afford. Programs such as the Home Possible Advantage and the VA loan program exist to offer financial assistance to veterans that may be struggling with their finances.
There is also down payment assistance which will help subsidize the costs of buying a home or using it for the interest rate when applying for loans. As always, buyer beware and do your research before applying for any mortgage.
Consider Alternative Down Payment Sources
Mortgage rates are lower now than they were before the financial crisis, but buying a home is still an expensive endeavor. Unless you have hundreds of thousands of dollars saved up to buy the house outright and can afford to pay it off within 10 years or less, you’ll need to take out a mortgage loan from a bank.
Look at the Price-to-Rent Ratio in Your Area
The price-to-rent ratio is the cost of home ownership divided by the cost of renting. The idea is that it should be more expensive to buy than to rent because if you are buying, you are putting your money into a depreciating asset. Renting allows your money to generate more money as you continue renting and also allows for changes in your living needs.