Whether you’re looking to buy your first home, you’re ready to upgrade from your current place to have more room to grow your family, or you need to downsize in retirement, one of the first questions you should answer is how much home you can afford. Calculating the information can help you shop for homes in the right price range.
What Lenders Review
To determine how much money you can borrow, lenders look at several different things, including:
- Household income
- Monthly debts (car loans, student loans, credit cards, etc.)
- Cash for down payment
The 28/36 Rule
There is no set amount that you have to spend on your mortgage every month, but as a general guideline, lenders use the 28/36 rule. That says that your total mortgage payment should not be more than 28% of your monthly income before taxes (gross income) and your total debt payments should not exceed 36% of your gross income.
Calculating these numbers is easy, just take your paycheck and find out how much you make before taxes, then multiple that by 0.28 to get the maximum monthly mortgage payment. Multiply your gross income by 0.36 to get the total debt amount.
Next, add up what other debts you make a monthly payment on, such as car loans, student loans, or balances on your credit card. Add them together and subtract it from the 36% to find out about what your monthly payment should be.
For example: Together Suzy and Adam make $120,000 a year
- Their gross monthly income is $10,000
- They have two car loans with total monthly payments of $853
- They also both have student loan payments totaling $340
28% of gross income: $10,000 x 0.28 = $2,800
36% of gross income: $10,000 x 0.36 = $3,600
Monthly debt payments: $853 + $340 = $1,193
Calculating 28% of Suzy and Adam’s income would indicate that they could potentially have a house payment of $2,800, but since they have $1,193 in other debt payments, to keep their total debt under the 36% target would mean the highest house payment they can afford is around $2,400. You can use an online calculator to determine what total house cost that specific payment can get you.
Remember These Are Just Estimates
It’s important to note that these are estimates and don’t take into account your own lifestyle and other needs. You may learn that you can afford a $2,400 house payment but if you want to have extra money every month to travel or put more into savings, you may want to buy a less expensive house.
Talk to Integrity First Lending to find out what you can get qualified to borrow. Then you can calculate your own personal budget and figure out exactly how much home you can afford.