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How Much Mortgage Can You Actually Afford?

 In first-time home buyers, Home Mortgages, New Home Purchase
How much mortgage can you afford?

What are all the factors that go into determining how much mortgage you can afford?
photo credit: AndreyPopov/CanStockPhoto

After you decide to buy a home, you are probably thinking the next step is to start house hunting. But before you can begin shopping for your dream home, you need to determine whether you can afford to take on the debt burden of a mortgage, and how much mortgage you are comfortably able to shoulder.

Pre-Approval Is Only Half of the Picture

Talking to your bank or another mortgage lender is a great starting point to find out what kind of price range you need to stay within as you shop for homes, but that is really only half of it. If you get prequalified or even pre-approved for a home loan, you know how much the bank is willing to lend you, but that number and the amount you can actually afford could be very different. You don’t have to borrow the maximum amount.

Monthly Payment

You already know what monthly payment you can afford, because you are probably already paying rent, along with other bills like credit cards, car payments, utilities, student loans, and on and on. You’ll still have all those bills, but instead of rent you’ll be paying the bank a mortgage payment combined with a portion of your property tax and insurance, which goes into your escrow account.

Income and Existing Debt Considerations

Lenders use something known as the 28/36 rule when deciding how much they are willing to lend. The first part means that your monthly payment–including mortgage principal and interest, along with insurance and taxes–can not exceed 28% of your monthly income. The second part of that ratio represents your total debt, including your mortgage payment and any other payments you make, and that total can not exceed 36% of your total monthly income. If one of these numbers is off, you would either need to consider borrowing less, or paying down some debt before taking out a mortgage.

When trying to decide how much mortgage you can afford, be sure to take your whole financial picture into account, and don’t forget to consider additional expenses that may not be included in your monthly payment. For example, when you rent, maintenance, and often some utilities, are included in your monthly payment, but once you are the homeowner, you’re responsible for everything.

Get started today. Visit goldenstatemortgage.com to talk to a lender about your mortgage options.

Sources:
How Much House Can I Afford?” time.com/money.
What Is the 28/36 Rule of Debt Ratio?” Bryan Keythman, thenest.com.

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