« What Percentage of Your Income Goes to Pay Your Rent or Mortgage Payment? | Main | The Winner of Last Week’s Drawing »
How Much House Can You Afford?
By JLP | January 30, 2007
If you are thinking about buying a house, either for the first time or upgrading, it is a good idea to calculate how much of a mortgage payment can you afford. It’s best to calculate these numbers BEFORE you start looking for a house. Otherwise, you run the risk of clouding your judgment or wasting your time looking at houses you can’t afford. So, how do we calculate how much we can afford? It’s not a hard calculation but it does require you to be honest with yourself.
I got this step-by-step calculation out of Suze Orman’s The Road to Wealth
STEP 1 - Figure Out Your Net Income
This is your income minus:
- taxes
- Social Security withholding
- retirement contributions
- and anything else that is taken directly out of your check
For this example, we’ll assume that your monthly NET income is $4,500.
STEP 2 - Add Up Your Monthly Payments on ALL Your Debt
These items can include the following:
- student loans
- car payments
- credit card payments
NOTE: do not include your rent or current mortgage payment.
If this number is MORE THAN 30% of your net income (or $1,350 using the $4,500 from above), STOP! You have too much debt! Your first priority should be to pay down your current debts so that you can better afford a mortgage payment in the future. I think this is prudent advice.
STEP 3 - Add Up ALL Your Monthly Living Expenses
Be sure to include EVERYTHING (even items that are marked savings). Be honest with yourself. If it’s something you pay once a year, divide it by 12 to get the monthly amount.
NOTE: Again, do not include your rent or current mortgage payment.
Subtract your monthly expenses from your net income (found in STEP 1). What’s left over is the MAXIMUM amount that you can afford to spend on your mortgage payment (including property taxes, homeowner’s insurance, maintenance, PMI, and any other hidden costs that come with home ownership.)
Keep in mind that this formula does not include any tax benefits that might be available to you via income tax deductions. It would be beneficial for you to sit down with your tax consultant or your tax software and run the numbers to see what type of deductions you might be able to get. Any deductions will lower your monthly costs of homeownership.
Whatever you do, DO NOT rely on the mortgage lender/broker to tell you what you can or can’t afford. Trust me, most of them are not looking out for your best interest. They want to sell you a loan and make as much money as possible. Yes, there are some qualifications involved in getting a loan, but I know from experience that lenders will lend you more than you might be comfortable with.
What if you’re not ready for a mortgage payment? Don’t sweat it. Pay down your debts, save up some money, and have patience.
Topics: Budgeting, Financial Planning |