How much mortgage can you afford?

How much can you afford?

How do some people always get THE BEST DEAL with the lowest rate and the lowest points?
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Check out this guide for some great tips to get the best deal possible! Enjoy!

So, assuming you have an acceptable income source, and credit profile, how much can you afford? Everyone has a different comfort zone on this front but there are general ground rules. In general, mortgage guidelines target a "debt ratio" under 40%. Let me clarify again, that is in general. You may want to be at a level much lower than that to ensure you have maximum comfort and financial flexibility and others may go higher. In some cases, applicants have been approved even above 50% with compensating factors like a lot of money in savings, a long history of paying bills at that level, or a large enough income that even at a higher level, there is still plenty of "disposable" income left after all the bills are paid. Consider this example. One applicant earns $2000 per month and one applicant earns $10,000 per month. A 50% ratio on the $2000 per month applicant would leave $1000 (before taxes) left to buy groceries, travel, etc. A 50% ratio on a $10,000 per month applicant still leaves $5000 left over. you get the idea. Here is how the calculation works:

Take your GROSS monthly income and divide by your total monthly debt load including your new mortgage payment but generally not including items that will not show up on your credit report such as gas, groceries, cable, etc. Just use credit card payments, installment loan payments, car loans, etc. Add them all up and go online to find a mortgage payment calculator that will give you a basic idea of payment based on different loan amounts. You will need to include taxes and insurance on your home so leave a buffer to include those. Here is an example:

$4000 per month in income

$400 car payment

$100 credit card payments

$70 student loan payment

$800 target mortgage payment

$200 for taxes and insurance

The total debt is $1570 which when divided by ross income is 39.25%, This would likely qualify but only you can know what makes you comfortable. Especially if you are a first time home buyer, you should set yourself up for financial success by ensuring you have plenty of wiggle room with your monthly expenses. The unexpected will happen in life!

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