How much house can you afford? Knowing you want to buy a home is one thing; knowing how much of a mortgage payment you can handle is quite another. Too often, dreams and reality collide: You're yearning for a four-bedroom Colonial, but given your income and debt owed to credit cards and beyond, the best monthly loan payment you can manage is for a two-bedroom bungalow in a sketchy party of town.
So how do you pinpoint a house where the monthly mortgage payment is financially within your reach, and one that won't drive you deep into debt? Allow us to help you paint your payment profile picture and find that magic number
Your income is only half the picture of what determines the monthly mortgage payment you can afford. The other half is your debt—meaning the debt you owe to credit cards, college loans, and other credit sources. Even if your income is high, having high credit debt means you have less money to put toward a monthly mortgage.
One way to factor your income and credit debt into how much mortgage you can afford is to follow the 28/36 rule, a simple but effective ratio for mortgage affordability.
The “28" refers to your monthly housing payment—things such as mortgage, home insurance, and property taxes—which shouldn't be more than 28% of your gross monthly income (ideally this payment should be less). This payment is easy to calculate, because all you need to do is multiply. For example, if your gross (meaning before taxes are taken out) monthly income is $6,000, you would multiply that by 28% (or 0.28), which equals $1,680—this is the maximum amount of your monthly housing payment.
The “36" refers to your debt-to-income ratio. This ratio compares your debt, or how much money you owe (to credit cards, colleges, car loans, and—hopefully soon—a home loan) to your income. This ratio should be “no more than 36%,
Think about this ratio in terms of your monthly expenses: If you have a monthly income of $6,000 but also spend $500 paying off credit cards or other debt, you would divide $500 by $6,000 to get a debt-to-income ratio of 8.3%. This ratio is great, but adding $1,680 in monthly mortgage payments would push up your debt load to $2,180 and your debt-to-income ratio to 36%. This ratio is exactly the maximum experts say you can afford. Going past this threshold is a risky move. Ignore this ratio, and you could end up with a house that, over time, could drive you even deeper into debt.
Last but not least, the amount you have for a down payment matters, too. Ideally, to get the best mortgage rates and terms, you'll want a down payment amounting to 20% of the price of the house. But if you don't have that much, rest assured you can put down less. FHA loans, for instance, need a down payment of only 3.5%.
Once you know both the down payment you plan to contribute as well as your monthly income and debt, you can easily work out the maximum monthly mortgage payment you can afford—and by extension, the priciest house you should buy.
Plug in your own numbers and see what happens! For this and many more reasons you should see a professional real estate agent. An agent can direct you in all matters concerning your next successful transaction. Call me Patti Alonzo and set up an appointment and get more information on all your Real Estate needs.
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