Experts say you will typically spend about a third of your income on financing your home.
Before you start to look for your dream house, you should figure out just how much of that
dream you can afford.
Mortgage lenders look at your ability to repay the mortgage loan by reviewing:
- Your credit history
- Your monthly gross income
- How much cash you can accumulate for a down payment, which is usually 10 percent to 20
percent of the sale price.
For details on checking your credit history, see the Bankrate.com report Credit: The Basics.
Home-Buying Tip
Planning is the key to a successful home purchase, said Doug Anderson, a member of the
National Association of Mortgage Brokers. The Denver, Colo., broker says in today's market
interest rates are low, but real estate prices are high.
"You should pay off as much debt as you can before shopping for a house," said Anderson,
such as car loans and credit card bills. "And try to save a couple of hundred dollars a
month for the down payment to bring down the loan amount."
General Guidelines
You can easily determine how much house you can afford by following a few general
guidelines:
- Your monthly mortgage payment -- including principal, interest, real estate taxes
and homeowners insurance -- should not be more than 28 percent of your gross monthly income
(before taxes). This is your housing expense ratio.
- Your total monthly debt obligation should not be more than 36 percent of your gross
income. Total debt includes the mortgage payment plus other obligations such as car loans,
child support and alimony, credit card bills, student loans, condominium association
fees. (Note: Government and certain other lenders may be more lenient.) This is your
debt-to-income ratio.
Example
Let's take a homebuyer who makes $40,000 a year. The maximum amount of money available for a
monthly mortgage payment at 28 percent of gross income would be $933. However, the lender
says the total debt payments each month should not exceed 36 percent, which comes to $1,200.
The following chart may help you see what is your maximum monthly debt loan based on your
annual gross salary:
| Gross
income |
28% of
monthly |
36% of
monthly |
| $20,000 |
$467 |
$600 |
| $30,000 |
$700 |
$900 |
| $40,000 |
$933 |
$1,200 |
| $50,000 |
$1,167 |
$1,500 |
| $60,000 |
$1,400 |
$1,800 |
| $80,000 |
$1,867 |
$2,400 |
| $100,000 |
$2,333 |
$3,000 |
| $150,000 |
$3,500 |
$4,500 |
Taxes and Insurance
There are a few other considerations to compute when deciding how much home you can afford:
- Real estate taxes -- Since taxes are part of your monthly mortgage payment,
it is important to get an estimate of the property taxes in the area where you want to look
for a home. You can ask your real estate agent, or call the tax office in the town where you
are house hunting and ask what is the local tax rate.
- Homeowner's insurance -- You must insure your property in order to obtain a
mortgage. You can get an estimate of insurance costs from your insurance agent or a major
insurance company in the area where you are house hunting. Be sure to inquire about special
requirements for hazard insurance, such as mandatory coverage for floods, earthquakes, or
windstorms in coastal areas. If you put down less than 20 percent of your home's value, you
also will have to pay private mortgage insurance (PMI).
Calculator
Armed with the above information, check out the Bankrate.com calculator, How much house can you afford?
Note: The calculator asks if there is any mortgage insurance. See the section on private
mortgage insurance (PMI) for more details.
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