Calculating how big of a mortgage you can afford isn’t always straight forward, but it doesn’t have to be incredibly complicated either!
To figure out what kind of mortgage you can afford, we need to look at several things:
- Your household income
- Your monthly debts, such as car payments, student loans, and other debts that you will pay regardless of where you live
- How much money you have saved for a down payment
While your monthly debts may ebb and flow, there are certain ones that are regular, or at least will be for an extended amount of time. It’s also important to not be putting all of your income into your mortgage in case there is an emergency. It’s a good idea to have 3 months worth of income in savings just in case.
How much of my income should go to mortgage?
Different financial guides and gurus will suggest different amounts, but they typically range from 28% of your monthly income to one-third of it. At the same time, your debts should range from about one-third to 36% of your income.
Let’s say you make $5,000 per month before taxes. Your mortgage payments should fall between $1400 and $1667 a month. This payment will include your interest and any other charges, such as private mortgage insurance (PMI). Also, the higher your credit score, the lower your mortgage rate will be, so having a good credit score is important to get the most bang for your buck.
What about my down payment?
The type of loan you qualify for can greatly affect how much of a down payment you need. Conventional loans can mean needing a down payment that is equal to 20% of the cost of the house, while FHA loans require as low as 3.5%, while a VA loan typically doesn’t require a down payment at all.
How does it all add up?
Let’s go back to the example of earning $5000 a month pre-tax. With a monthly mortgage payment of about $1400, this person could borrow up to $221,000 with an interest rate of 6.515%. (This rate is typical at the time of writing, but it may go up and down based on credit and the economy.)
With an FHA loan requiring 3.5% down payment, this means this person would need a down payment of about $7735. The total house price could then be as high as $228,735.
However, if this person has a 20% down payment ($44,200), the total house price could be as high as $265,200.
For an even easier way to calculate what you can afford, check out this mortgage calculator.