Before you start looking for your dream house, you need to figure out how much you can actually pay each month. These calculations are based on a typical 20 percent down payment.Understand mortgage affordability by assessing income, expenses, and debt-to-income ratio to choose a home loan that fits your financial goals.
Steps:
- Collect some home guides or look at a few ads in the Sunday newspaper for houses you would consider buying. Check the prices of a few homes you’re interested in, then multiply those prices by 0.80. This will give you an estimate of how much you might borrow for the mortgage on those homes. (This assumes you’re making a 20 percent down payment.)
- Calculate what the mortgage payments for these homes would be. Use personal finance software or an online mortgage calculator. To quickly estimate your monthly payments, check out “How to Estimate Your Mortgage Payment” on eHow.
- Add the monthly payments for property taxes, insurance, and private mortgage insurance (PMI).
- Add to this number your monthly utility costs. (If you’re renting and don’t know what utility costs are, ask your friends or family how much they pay. Or ask your real estate peddler for typical figures.)
- Add home maintenance to your monthly budget. Plan to spend about 1% of the home’s cost each year on maintenance. For example, if the house costs $150,000, set aside $1,500 per year or about $125 per month.
- Add in the prorated monthly cost of any furnishings, landscaping, and nonessential improvements to the house.
Compare this maintenance cost with your monthly net income to help you estimate if the home is affordable. - Multiply your monthly income by 0.40 (40 percent is a standard measure). If the maintenance cost is equal to or less than your estimated monthly budget, the house of your dreams could be within your price range.
Tips:
If you have consumer debt (like credit cards or personal loans), try to pay it off or reduce it. This will help you qualify for a mortgage and make monthly payments more manageable.
Also, make sure to include any monthly payments (car loans, credit cards, personal loans, etc.) when calculating what you can genuinely afford.
Warnings:
Lenders can tell you what you might be able to afford based on your salary and debt, but you also need to be comfortable with the actual monthly payment.
Don’t assume you can just cut back on expenses to stretch yourself into a higher house payment. You can only eat so much boxed macaroni and cheese!
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