There isn’t just one universal factor that you can rely on to determine how much you can afford to pay for your home every month. But, there is a formula that you is quite useful as a starting point.
Your monthly debt payments should not exceed 45% of your total income. This includes your mortgage. Keeping that in mind, here are some important factors to consider when setting your home budget:
- Your liquid assets
- Your current income
- Your debt-to-income ratio
- Any work that your new home may/will need that will be added to your overall monthly costs
Your debt-to-income ratio is especially important, as this is what lenders will use to determine whether or not they will pre-approve you for a loan. In addition to property taxes and necessary insurances, lenders will also use the following items when formulating your debt-to-income ratio:
- Credit cards (including store cards)
- Homeowner’s dues
- Student loans that will not be deferred within the next 12 months
- Auto loans
- Bills that have gone into collections
- Child support
How Much Mortgage Can I Afford?
Since any one or more of the above items can already tie up 45% of your income in debt, many lenders and mortgage advisors recommend keeping a more conservative home-buying debt-to-income ratio. If possible, try to limit your mortgage amount to no more than 28% of your income. Take a look a this handy mortgage calculator from Consumer Affairs.
While it’s always a good idea to be conservative with your potential mortgage payment, especially for first-time homebuyers, there are some people who can afford to go a bit beyond the boundaries. These people include those who are selling liquid assets; those who are in stable, long-term jobs, and those who will be experiencing an increase in income through a raise/bonus.
Even if you are one of the exceptions mentioned above, take a look at your finances and your lifestyle. Ask yourself, “How much mortgage can I afford.” Be honest with yourself about your income and debt.