 How
Much House Can I Afford?
Determining how much house you
can afford is one of the first steps in the home buying process. Lenders
look at more than just gross income when determining the amount of money
they are willing to loan. Other factors include outstanding debts, cash
available for down payment, and credit history.
Mortgage expenses include
principle, interest, taxes and insurance. Mortgage expenses should not
exceed 28% of your gross monthly income to qualify for a Conventional
Loan or 26% of your gross monthly income to qualify for an Adjustable
Mortgage Rate loan.
To determine the Maximum Monthly
Payment you could qualify for, divide your annual income by twelve to
obtain your gross monthly income. Then multiply that amount by the
percentage that corresponds for the type of loan you wish to qualify
for.
Example: Your annual income is $75,000 and you would like to qualify for
a conventional loan.
Divide
$75,000 by 12 months. This gives you a gross monthly income of $6,250.
Multiply $6,250 by 28%. The maximum monthly payment you should be able
to qualify for is $1,750.
If you have existing debts, such
as an automobile, credit cards or student loans, your Debt-to-Income Ratio
shouldn't exceed 38% of your gross monthly
income.
Using
the same monthly income as in the previous example, multiply
$6,250 by 38% for a total monthly debt of $2,375. Next subtract your
other monthly payments:
$2,375 Total Monthly Debt
-$300 Car Payment
-$200 Credit Card Payment
-$150 Student Loan Payment
$1,725 Mortgage Expenses
The maximum monthly payment you would qualify for is $1,725.
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