How much mortgage can I afford?

by on September 29, 2012

Before potential homeowners apply for a mortgage, they may ask themselves, “How much home can I afford?” Asking this question before they apply is a smart idea, because knowing the answer will mean that they can look for houses that fall exactly within the affordable range. Once they find their dream houses and know that they can afford them, they will not have to be disappointed later if they were to apply for a mortgage that is too expensive for them.

The Future Homeowner’s Gross Income

The answer to the question, “How much house can I afford?” can be as much as two to two and a half times their gross income. Generally, this means that someone earning $100,000 before taxes will be able to afford a mortgage that is equal to between $200,000 and $250,000. Considering the gross income is a good place to start when answering questions like “How much home can I afford?”

The Applicants Current Debt Burden

To determine if the borrower will be able to make their new housing payments without any problems, the lender will look at all of their current monthly debts.  These debts may include car loan payments, credit cards, student loans, child support or alimony payments and   any other monthly oblibations.  Once these monthly debts are totaled, they can be used to help determine the affordability of the new mortgage.

Debt-to-Income Ratios – “Front-End Ratio” or “Top Ratio”

The lenders will be instrumental in answering the question, “How much home can you afford?” They will do a more in depth examination of the future homeowners’ finances. For example, if the top ratio of the desired house only requires that the future homeowners pay up to 29 percent of their monthly income toward their monthly principle and interest payments, the insurance and the taxes, it’s a house that they will be able to afford if their total monthly income is 29 percent or less of what their new housing payment would be, with principal, interest, taxes and insurance (PITI).

Debt-to-Income Ratios – “Back-End Ratio” or “Bottom Ratio”

The second way that lenders will answer the question, “How much house can you afford?” is by calculating the applicants’ bottom debt-to-income ratio. If a maximum of 41 percent of the applicants’ monthly income is designated toward pre-existing debts, as reported on their credit report, as well as their new housing payment, they can inform these future homeowners that they can afford the house.

Maintenance on the House

Owning a house adds extra responsibilities that people do not have when they are renting. These extra expenses must also be taken into consideration when asking the question, “How much home can you afford?” For example, maintenance on a house can be highly expensive if major repairs are needed, such as roof repairs. Appliances do not last forever, and homeowners will need to spend hundreds of dollars replacing them. Thinking about these issues may impact the amount of money that people will have to spend on their monthly payments, and whether or not they can afford the house.

The Utilities

When people are renting, they will not necessarily have to pay for all of the utilities. Homeowners, on the other hand, definitely will. Asking the question, “How much house can you afford?” will mean that future homeowners must make a list of all of the new utility payments they will need to make and if they can afford to add them to their monthly expenses and the mortgage payments. If they can afford the maintenance and the utilities, they can, most likely, afford to purchase the house.

As you can see, future homeowners have several measurements that will help them answer the question, “How much house can I afford?”  It can be to their ultimate benefit to look at these aspects before submitting a loan application.

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– who has written 7 posts on USDALoans-101.

Spencer is mortgage insider and expert in home finance.

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