4 Tips to Determine How Much Mortgage You Can Afford

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Real Estate Agent with Berkshire Hathaway HomeServices Anderson Properties

4 Tips to Determine How Much Mortgage You Can Afford

By knowing how much mortgage you can handle, you can ensure that home ownership will fit in your budget.

How much mortgage can you afford1. The general rule of mortgage affordability

As a rule of thumb, you can typically afford a home priced two to three times your gross income. If you earn $100,000, you can typically afford a home between $200,000 and $300,000.

To understand how that rule applies to your particular financial situation, prepare a family budget and list all the costs of homeownership, like property taxes, insurance, maintenance, utilities, and community association fees, if applicable, as well as costs specific to your family, such as day care costs.

2. Factor in your downpayment

How much money do you have for a downpayment? The higher your downpayment, the lower your monthly payments will be. If you put down at least 20% of the home's cost, you may not have to get private mortgage insurance, which costs hundreds each month. That leaves more money for your mortgage payment.

The lower your downpayment, the higher the loan amount you’ll need to qualify for and the higher your monthly mortgage payment.

3. Consider your overall debt

Lenders generally follow the 28/41 rule. Your monthly mortgage payments covering your home loan principal, interest, taxes, and insurance shouldn’t total more than 28% of your gross annual income. Your overall monthly payments for your mortgage plus all your other bills, like car loans, utilities, and credit cards, shouldn’t exceed 41% of your gross annual income.

Here’s how that works. If your gross annual income is $100,000, multiply by 28% and then divide by 12 months to arrive at a monthly mortgage payment of $2,333 or less. Next, check the total of all your monthly bills including your potential mortgage and make sure they don’t top 41%, or $3,416 in our example.

4. Use your rent as a mortgage guideHow much mortgage can you afford

The tax benefits of homeownership generally allow you to afford a mortgage payment—including taxes and insurance—of about one-third more than your current rent payment without changing your lifestyle. So you can multiply your current rent by 1.33 to arrive at a rough estimate of a mortgage payment.

Here’s an example. If you currently pay $1,500 per month in rent, you should be able to comfortably afford a $2,000 monthly mortgage payment after factoring in the tax benefits of homeownership.

However, if you’re struggling to keep up with your rent, consider what amount would be comfortable and use that for the calcuation instead.

Also consider whether or not you’ll itemize your deductions. If you take the standard deduction, you can’t also deduct mortgage interest payments. Talking to a tax adviser, or using a tax software program to do a “what if” tax return, can help you see your tax situation more clearly.

 

Source: G.M. Filisko. G.M. Filisko is an attorney and award-winning writer who’s owned her own home for more than 20 years. A frequent contributor to many national publications including Bankrate.com, REALTOR® Magazine, and the American Bar Association Journal, she specializes in real estate, business, personal finance, and legal topics.

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About the Author:

The above information was provided by Bo Kociuba a long time resident of Canadian County in Oklahoma. Bo is a Broker’s Associate and has been helping people sell and find new homes in Oklahoma City Metro for over 10 years. Together with her partner Buster Elliott they work as The B&B HOME Team. She is passionate about everything HOME - from buying and selling to interior design, decorating & photography. 
Bo and Buster are multi-million producers. 
You may contact Bo via email: Bo@BestOklahomaHomes.com or by phone 405-812-1572.
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The B&B HOME Team specializes in Residential & Commercial Real Estate, Ranches and Recreational Land and Land Development.

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Re-Blogged 1 time:

Re-Blogged By Re-Blogged At
  1. Judi K Barrett 01/11/2011 10:25 PM
Topic:
Real Estate General Information
Location:
Oklahoma Canadian County
Groups:
Oklahoma Real Estate
Tags:
homeownership
home buying
mortgage calculator
mortgage finance
home mortgage
mortgage
7 reasons why to buy now

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Judi K Barrett
Judi Barrett~Integrity Real Estate Services~Idabel, Oklahoma - Idabel, OK
Broker/Owner, Integrity Real Estate Services -IDAB

Hi Bo,

A great article.

Hope all is going well for you.

Having a general idea of how much mortgage a buyer can afford is good, getting that pre-qual letter from their lender sure does help too!

Jan 11, 2011 10:23 PM #1
Rainmaker
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Bo Kociuba & Buster Elliott B&B HOME Team 405-812-1572
Berkshire Hathaway HomeServices Anderson Properties - Mustang, OK
Selling OKC Metro and beyond ...

Hey Judi...Happy New Year! Everything well here...how is the new year treating you so far?

With smiles,

Bo in Yukon

Jan 11, 2011 10:50 PM #2
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