Mortgage Guide – Tips to Determine if You can Afford Home Ownership

by Property Management on July 7, 2010

Mortgage HomeOwnership Affordability

Mortgage HomeOwnership Affordability

To get a very rough estimate of what you can afford to spend, multiply your annual gross income by 2.5. For example, if your annual household income is $50,000, you might be able to qualify for a $125,000 home. This is a very rough estimate – the actual numbers will vary based on different factors like current interest rates and your debt and credit history. Other factors to keep in mind are your current bills and overall debt, your current lifestyle and future plans. But the most important factor in determining how much you can afford is taking an honest look at what you can spend comfortably for your monthly housing costs.

Mortgage lenders typically use two ratios to more accurately determine how much you can afford to spend on your mortgage.

*Housing Expense Ratio
Mortgage lenders recommend that your monthly mortgage payment (principal, interest, taxes and insurance) be less than 28-31% of your monthly gross income. This percentage can change based on the type of mortgage you choose and sometimes the area in which you’re looking to buy.
*Debt-to-Income Ratio
You need to factor your other debts into determining an affordable monthly mortgage payment. Mortgage lenders look at whether your total debt is larger than 30-40% of your monthly gross income. Remember, debt is not just credit cards and student loans. It can also include alimony, child support, car loans, and housing expenses.

Talk to a mortgage lender or housing counselor who can help you better understand the guidelines or requirements. Before you talk to one, organize your financial picture by creating a budget [PDF]. Don’t forget that you also have to save for the down payment, closing costs, inspection costs, moving, and other related expenses.

You should also take into account any future plans such as a wedding, college education or birth of a child that will impact your budget and how much you can spend on a home. It is important to be realistic – you don’t want to buy your dream home only to realize afterwards that it is more than you can comfortably afford.

Remember that the mortgage is not the only expense of homeownership. Other expenses include:

* homeowner’s insurance
* interest and taxes (which may be factored into your monthly mortgage payment)
* maintenance costs
* utilities
* water and garbage services
* unexpected repairs

When deciding what you can afford, be sure to look at the big picture and not just the price of the home.

Don’t make the mistake of trying to buy more house than you can afford. Thinking that you can get by for a couple of years until your salary catches up with your monthly mortgage payment is setting yourself up for trouble. Instead, buy what you can comfortably afford today – not 5 years from now.
Don’t be discouraged!

If what you can afford is less than the average single-family home in your area, look at townhouses, condos, and cooperatives – they’re often less expensive.

It’s better to start small than to find yourself with a mortgage you cannot afford!

Read below more on Home Ownership

Mortgage Guide – Questions to Ask Yourself Before Buying a Home

Mortgage Guide – Homeownership Myths and Facts

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