| If you're like most people, the thought that pops into | | | | example, assume that, after subtracting your car |
| your mind after thinking about buying a house is "how | | | | payment and credit card payment from the |
| much home can I afford?" The answer depends upon | | | | hypothetical $1440 amount above, you're left with |
| a number of factors. | | | | $1000. |
| With mortgage rates as low as they are now, | | | | How much will that $1000 buy in terms of a home? If |
| payments on a home loan are on a par with rent | | | | we assume that you're going to get a 6% interest rate |
| payments. Assuming that you don't have credit | | | | on a 30 year fixed mortgage, we can use a multiplier |
| problems or a lot of debt, you should be able to afford | | | | of 166.79, which means that $1000 a month will be the |
| a mortgage. | | | | payment on a $169,790 mortgage. |
| How large that mortgage can be depends upon your | | | | But don't forget your local government. They have to |
| income, debts, credit history, and how small or grand a | | | | get their cut. |
| house you want or are willing to settle for. | | | | Tax rates vary widely across the country, but 2.1% of |
| There are plenty of mortgage calculators on the | | | | the value of the home is close to the national average. |
| internet to help you figure out mortgage payments. | | | | This changes our multiplier at a 6% interest rate from |
| What's more difficult to calculate is how much you're | | | | 166.79 to 129.11, meaning that $1000 a month will pay |
| willing to change your way of living in order to own a | | | | for a $129,110 mortgage. If you already know the tax |
| home, assuming that you have to make any changes. | | | | rate in your area, you can use the 169.79 multiplier to |
| Having a house shouldn't take priority over your | | | | get the amount of mortgage you would qualify for, |
| happiness. | | | | then figure the taxes and readjust until you come |
| To figure out how much home you can afford, write | | | | close. Use a monthly mortgage calculator to arrive at |
| down your monthly budget. Put everything on that list, | | | | the final figure. |
| especially credit card payments, car loan payments, | | | | You'll also have to pay insurance. A safe number to |
| alimony, child support, or any other regular monthly debt | | | | use for home insurance is .2% of the home's value. If |
| payments. Don't forget to write down what you spend | | | | we use that figure, our multiplier at 6% now becomes |
| for food, entertainment, clothing and other expenses. | | | | 126.39. So, your $1000 a month will now pay for a |
| Now write down your monthly household income | | | | $126,390 mortgage. |
| before any taxes. Use the income you reported on | | | | You can use these multipliers to arrive at a monthly |
| your latest tax return. If your income has increased | | | | payment for any income, based upon a 6% rate on a |
| significantly since your last return, make sure you have | | | | 30 year fixed. |
| pay stubs or other means to prove to a mortgage | | | | There's also the issue of a down payment. A rule of |
| lender that your income has increased. | | | | thumb is that lenders will want 20% of the purchase |
| In figuring out how much home you can afford, the first | | | | price as a down payment, although some lenders will |
| number you need to start with is 28%. This is the | | | | go lower. FHA loans can require a down payment of |
| percentage of your monthly pre-tax income that most | | | | as little as 3%. If you're buying a home for the first |
| lenders consider to be the maximum you should be | | | | time, or don't have much equity in your existing home |
| paying on a mortgage. Some lenders will go higher | | | | to use as a down payment, you'll need to find a way |
| than 28%, and some will be lower, but 28% is a good | | | | to get a sufficient down payment. You can't borrow |
| rule of thumb. | | | | the money for a down payment, but it can be gifted to |
| If your monthly pre-tax income is $4000, your | | | | you. |
| maximum monthly mortgage payment is 28% of that, | | | | After you've determined how much of a mortgage |
| or $1120 a month including taxes and insurance. | | | | you can afford, you need to decide just how much |
| You also need to take into account your debts, so the | | | | you're willing to pay. Will that $1000 a month payment |
| second number to keep in mind is 36%. This is the | | | | cut into your entertainment expenses, or expenses for |
| percentage of your monthly pre-tax income that most | | | | other things that are important to you? If you're like |
| lenders will consider to be the maximum you should | | | | most people, spending 28% or so of your monthly |
| pay for a mortgage payment and other regular | | | | income isn't much different than paying rent. If you're |
| monthly debt payments. Again, some lenders will be | | | | not like most people, maybe a house isn't for you. |
| higher and some lower, but 36% is average. | | | | The numbers above are for illustrative purposes. The |
| Using the hypothetical $4000 a month pre-tax income, | | | | rate you get on a mortgage may be higher or lower |
| the total of your mortgage payment and other monthly | | | | than 6%. Your lender may allow more or less than |
| debt payments should not be over $1440. | | | | 36% of your income to go towards your monthly |
| Knowing what your house payments can be, we can | | | | debts. |
| roughly estimate how much house you can afford. | | | | Unlike renting an apartment, owning a home carries |
| You can later decide how much you'd be happy | | | | additional costs that can affect your lifestyle. If you |
| affording. | | | | want to keep your home in good condition, it's safe to |
| From the 36% amount you derived from your monthly | | | | assume that you'll need to spend at least a couple of |
| income, subtract the regular monthly debt payments. | | | | thousand dollars a year on items like furnaces, roofs, |
| For credit cards, use the minimum monthly payment | | | | lawn and garden, repairs, and routine maintenance. You |
| shown on your statement. After subtracting your | | | | can do it yourself, or you can pay more to have the |
| monthly debt payments, the amount you have left is | | | | work done, but you can be certain that you're going to |
| what you can afford to pay on a mortgage. For | | | | pay something one way or another. |