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Dan Chase's Blog

By Dan Chase | Home Buyer in Texas City, TX

How to determine what you can safely afford to pay towards your monthly mortgage payment. Lenders might give a higher number.

The first thing a buyer should do is figure out how much they can afford for all housing costs based on their budget. This MUST include all property taxes, house insurance, and repairs. Once you buy a house you have to pay for utilities including electricity, heat, & a/c. Sooner or later parts of the house like furnaces, water pumps, flooring, plumbing, and roofs will wear out. These will cost you real money to repair or replace. The monthly mortgage payment is just one part of the true cost of owning a house. The rest has to be included to find a truly affordable monthly house payment.

To find out what can really be your affordable monthly house payment perform a financial survey of your life. Figure out how much you really spend each month excluding what is spent on rent and other housing costs now. This means you add up whatever you spend on food, gas, car, clothes, repairs, cable tv, internet, phone, movies, clothes, and EVERYTHING you spend money on (including bubble gum) for the month.  If you only buy clothes (or anything else) once a year divide that cost into 12 months. Perhaps like me you pay for car insurance (or something else) every 6 months. Divide that by 6. Whatever this number is that you spend each month once you subtract it from your monthly income whatever is left is the absolute maximum you can afford to spend on a house and savings.

The number you just discovered includes the big mortgage payment as well as the smaller non mortgage costs. House insurance, taxes, electricity, water, sewer, repairs, heat, a/c, and more costs all have to come in under this amount.

A buyer must save some money for those unanticipated repairs that WILL happen given time. A smart buyer would remove at least 20% of their income for repairs, savings, and retirement. Whatever is left is the most that can really be affordable to spend on a house

The problem with simply asking a lender how much you can afford to borrow on a house is that lenders do not see your real spending habits. A lender might allow you to borrow more or less money than you can truly afford to pay towards a mortgage. Once you have determined what you can safely spend each month do not be surprised if it is a lot less money than what a lender will allow you to borrow. Knowing your own personal comfortable payment level will help you not to become house poor.

I personally would want to save at least 10-20% of my income after all other expenses for things like repairs, savings, and retirement. I would also want to allow for higher food costs, kids approaching their teenage years, higher heating fuel and electricity costs as those costs could rise dramatically in the future.

As a final thought how much can you safely pay each month? A general rule of thumb is no more than 30% of your take home pay. Do not forget to save 20% towards savings, repairs, and retirement. Another old rule of thumb is no more than 3 times your annual income. After doing your own calculations and having your safe monthly payment it is time to get an answer from a lender.

Comments

By Dan Chase,  Sat May 7 2011, 11:48
Lenders may allow you to borrow more money than you can really afford to borrow. Do not allow this to happen to you.

Borrowing to much and becoming house poor being unable to even afford to replace the front steps when they become rotten is not a situation anyone should end up in.
By Scott Godzyk,  Sun May 8 2011, 17:10
A great blog that holds true, just becuase they say you can afford doesnt mean you can unless you want to eat boxed macaroni and cheese every night for 10-30 years. If home owners and buyers use dyour advice many would not have refinaced 3 times or bought houses that were just too much for them.
By Timothy M. Garrity,  Sun May 8 2011, 17:32
Great post, Scott.

TG
By Bill Polack,  Sun May 8 2011, 19:25
Great advice Dan. As a financial planner, I stress that to clients prior to buying a house. Sadly though, my former company can go up to 58% of gross income to qualify a person and loan officers forget the cost of living. Another thing I'd like to add is for the buyer to forget that he/she will have a renter in that spare room to offset expenses. There's a reason why rental agreements are only for 1 year.
By Dan Chase,  Sat May 14 2011, 12:39
Thank you all for the kind comments. I tried to show a simple way to see what is affordable not just mortgageable. If I know I can really only afford $1,000 a month even if a lender will offer me a $1,500 a month mortgage payment I know I can not afford it.
By Jen Hepler,  Sun Nov 20 2011, 09:37
Thanks for all of the advice!! From what I've read, I've come to two conclusions; 1 is that my mortgage can not be over $400.00 a month. 2 is that I better save more money before trying to buy a house. EEK! I guess I'm going to be looking for a second job.
Oh! I was also going to ask if college students get any discounts with banks for home loans?

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