How Much Mortgage Can You Afford?

Probably the most important question you need to ask yourself before applying for a mortgage is: How much can I afford? Interst.com columnist, Stef Donev, explains how to determine this in his article, “Getting a mortgage: How much can you afford?”

The best way to determine how much of a mortgage you can afford is to first calculate your monthly payments. Donev breaks down the finances involved with affording a conventional loan.

“Housing costs-- including principal, interest, taxes, assessments or any other fees shouldn’t exceed 28% of your gross or pre-tax income. Monthly debt payments including your mortgage, auto loans, utility and credit card bills shouldn’t exceed 36% of your pre-tax income.”

To help better explain this, Donev uses an example of what to expect if you and your spouse makes a combined $50,000 per year before taxes.

“Your total “debt limit”-- mortgage, car payment, utilities, and such—would be 36 percent of that, or $18,000 a year, which equals $1,500 a month. Of that amount, the most your house payment can be is $1,167.”

You would qualify for a conventional loan if all of your monthly debts totaled $333 or less per month. If your monthly debts were $500 per month, you would qualify for a mortgage with a regular monthly payment of $1,000.

“With a $75,000 family income, the 36% figure is $2,250 a month and the limit on the mortgage payment is $1,750. At $100,000 salary, it’s $3,000 a month with a mortgage limit of $2,333.”

The 36 percent figure is usually more import than the 28 percent one.

“If you determine that you can make a $1,200-a-month mortgage payment, you have to look at how big a loan that translates, into terms of interest rates, insurance and so on.”

Essentially, you could end up making a $1,200 monthly payment on a home you put $5,000 down on, or one that you put $50,000 down. There are many ways to calculate you mortgage payment. Just make sure you do not take on a mortgage you cannot afford.

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