How much can you afford for a home?

How much you can afford is a main concern, if not the biggest question you'll have, when you begin shopping for a new home. If you are looking to buy a home, these steps will help you determine just how much you can spend on a home.

1. Calculate the mortgage payment

   It's most likely that you'll need to take out a mortgage to buy a home - few buyers purchase a home completely with cash. If you'll be taking out a mortgage, use an online mortgage calculator like the one at Trulia to estimate how much your mortgage payments will be by typing in values like the price of the property, what percentage of the price you plan to pay in a down payment (e.g., $40,000 for a 20 percent down payment on a $200,000 home), the dollar amount of your loan, its annual interest rate, and private mortgage insurance, if any.

2. Visit a mortgage lender

   Get pre-qualified for a mortgage loan, and if you can, get estimates from several lenders. The lender(s) will tell you how much you'll be able to finance through a loan and what your monthly payments will be. When you begin your home shopping in earnest, get pre-approved by a lender. When you are pre-approved by a lender, it means that the lender has agreed to lend you a specified amount under certain conditions (length of the loan, interest rate, etc.) This agreement gives you a definite idea of how much you are able to borrow.

3. Calculate your monthly housing costs

   Once your know how much your monthly mortgage payment will be, calculate your monthly housing costs, which will include your mortgage payments, property taxes and homeowner's insurance. Ideally, these costs shouldn't exceed 28 percent of your gross income. To pad your estimations to cover any unforeseen expenses, you may want to try not to exceed 28 percent of your take-home pay (which is lower than your gross income) -- instead of basing your calculations on your income before taxes. So, if your monthly income is $5,000 after taxes, you could aim to keep your total monthly housing costs at about $1,400 a month ($5,000 x .28=$1,400).

4. Consider your debt

   Take stock of your debt including car loans, student loans and credit cards -- and try to keep your total debt, or your debt to income ratio (including your mortgage debt) to no more than 36 percent of your gross income. (For more leeway, base your calculations on your net, or your after-tax pay.) So, with a take-home pay of $5,000, you may want to aim for a total debt of no more than $1,800 a month. ($5,000 x .36 =$1,800).

5. Factor in general expenses

   This includes how much you may have to spend per month to heat, cool and maintain your new home (including cleaning and lawn services if you plan to use those), plus monthly commuting, food and entertainment costs. The amount you spend on these items per month will leave you with less income to put toward mortgage payments.

6. Determine the closing costs

   Don't forget that you'll have to pay about 2 to 5 percent of your home's purchase price in closing costs (for a home inspection, lawyer's fees and discount loan points), so subtract this amount when calculating how much money you'll have for a down payment. (E.g., for a $100,000 home, you may have to pay $2,000 to $5,000 in closing costs.)

7. Don't leave yourself "house poor"

   You'll want to have some savings on hand to pay for any decorating, furniture or fixes for your home. If you don't save extra cash for these items, you might find yourself sitting on the floor in your new house for quite some time. Ouch.

Comments

By Chad Bergman,  Tue Dec 8 2009, 11:00

December 12, 2009 Fannie Mae will be implementing changes to it's desktop underwriter DU. One of these changes will be the maximum total expense ratio of 45%, with flexibilities up to 50% for certain cases and strong compensating factors.

Before this ratio could get as high as ths mid 50's for some approvals.

My recommendation to clients is if your housing expense is going up from it's current level where are you going to 'cut' from to pay for the difference? If you've been setting aside the difference in a savings account then you're lifestyle shouldn't be affected. Money is just shifted from savings to mortgage. Many times that extra payment comes from other items like dinning, entertainment, cloths, travel. Just be prepared for the trade off.

Be prepared for the unexpected expenses & life changing events when planning for a fixed payment like a mortgage.

Please let me know if you have any questions or comments:

Chad Bergman, CML
Frost Mortgage
http://www.MyDenverHouse.com

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By Dan Chase,  Sun Dec 27 2009, 14:07

I find that yearly income x 3 = a safe gettable mortgage unless serious debt already exists.

If you make $50k x 3 = $150k for a mortgage. Rough, but it is fairly close for a beginning calculation.

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By Vicente Cruz,  Tue Jan 12 2010, 18:31

PRIMITIVE CALCULATION OF 3 TIMES ANNUAL GROSS (BETTER USE NET) INCOME WOULD ASSUME THERE IS JOB SECURITY TO COVER THE MONTHLY PAYMENT.

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By Danielle Rauch,  Thu Jan 14 2010, 09:40

I'm a future first time home buyer and don't know a whole lot about mortgages and all of this.

I have a couple questions about this and hopefully someone could help me.

-Do the seller and the buyer pay closing costs?
-Is it possible to split closing costs?
-Do lenders allow you to include closing costs in with your mortgage so you don't have to pay 2-5% at once?

Thank you for any help, I'm trying to find out as much information as I can before I actually buy in a year.

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By Mortgagelady,  Mon Feb 15 2010, 12:34

Hi Danielle, You should really meet with a local professional that comes recommended and that you feel you can trust. They will answer most of your questions, and may no of some local programs that can help you as a first time homebuyer. I will give you some general info.
- Yes, both buyers and sellers have closing costs.
- It is possible to negotiate that the seller pay your closing costs. The % of those costs allowed to be paid is determined by the loan program you are in. FHA currently allows the seller to pay up to 6% of closing costs and pre-paids to the buyer. That may be reduced officially to 3% by the Spring time. The 3% is what is allowed by most programs and generally will cover most of your costs.
- The only program I know of (18 years in the business) that allows you to finance the closing costs is the USDA loan. This is only allowed if the house appraises for more than you pay for it. ( I am only addressing purchase transactions)
-The lender will allow for certain closing costs to be included, like the Up front mortgage insurance on an FHA, or the Funding fee on a VA, or the Funding fee on a USDA loan, but most other closing costs have to be paid by either buyer, seller, or a grant program.
-The only other way to cover some of the cost is called premium pricing. It's sort of like the bank paying you points. Instead of getting a rate of say 5% paying 1pt. You may get a rate of 5.375 and the bank gives you a credit of 1 pt. towards your closing costs. 1% would equal, 1% of the loan amount. If you loan was $150,000, 1% would be a $1,500 credit to off set your total costs. It's not an ideal way, but it may get you over a hump if you are a little short.
You may be eligible for a grant if you are a first time homebuyer. They are generally 2nd position loans, that are deferred, and forgivable after a certain period of time. I don't know were you are shopping, but I can give you an idea on how to look for them. Good questions, best of Luck!

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By Michael Russell,  Fri Apr 9 2010, 20:29

I like the times three on net. Most lenders/underwriters allow buyers to stretch too far, welcome to foreclosure mart, prices are dropping. Danielle, carefully consider waiting until you have your down payment and closing costs(2-4% avg.) saved because financing those closing costs means you pay interest on them for a very long time. Or have your Realtor negotiate that much off the asking price(if that's a fair market price) since you have leverage in this buyers market. Someone mentioned job security, there is none. no who cares anyway, there are no pensions or loyalty to experienced workers left so most will just hop around to better conditions, pay, etc. as they see fit. There is no corporate straight line up in profits unless you axe the workers who have put in the time to be more valuable and recycle them with new graduates. I'm not saying all corporations do this but enough to be sickening.

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By Fillmore,  Sun May 16 2010, 21:21

Hi, my home is 4 years old (250K) in a very small community of 75 homes (2 streets). . There are new homes 80k to 200K being build next to my community. I am already surrounded by older 150K homes. I would like to move to another neighborhood, but there are no other neighborhoods in our price range of 250K - 350K. I am afraid that if I remain in my home, my property value will drop and make it more difficult to sell at a later date--we are already starting to see some signs of increased crime (car break-ins). There is a neighborhood of custom homes close to where er currently live, and close to our work location. The minimum we could probably build for (based on home requirements) is about 450K, which is a stretch on our budget. We would have to pull from our 401K to afford the down payment for construction. We both have very stable jobs and income levels that can support the higher payment and still allow us to continue our 401K and mutual funds. We would no longer have an emergency fund. I am almost sure that our current neighborhood will go down and have increased crime. Also our current home was not built well and already showing signs of poor construction. I know it is probably a bad idea to try and move, but I wanted to get your thoughts, thanks.

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By Zmh1423,  Tue Aug 17 2010, 19:13

My wife and I are looking to buy a home and we make $52k a year take home(after taxes). We are looking at buying a home that will cost us $1175 a month including all the taxes and insurances. We are just starting out and want to make sure we can afford this home and not be house poor. Does this look doable for us?

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By Christopher Sawyer,  Sun Sep 12 2010, 12:20

The safest place to be is to have a housing payment (rental or not) at less than 33% of your TAKE HOME pay. Some banks will cap you at 36% of your GROSS pay which is much much higher. 1/3 of your take-home pay is a much easier guideline and it's very conservative, but it leaves you with plenty of income left over for housing expenses you will have---like the yard, utilities, and house upkeep and all those trips to Lowe's and Home Depot.

You pay housing expenses out of TAKE HOME pay, not gross pay---so take what you get in pay once a month and divide it by what your rental payment is now.

So if your take home pay is $5,000 a month and you currently rent for $1,200 a month... then 24% of your take home pay is going towards housing. So for every $1 you get in your paycheck after taxes and contributions, $0.24 of that disappears and you never get to see it.

If your healthcare costs are going to be going up and you have employer-paid health insurance, that could definitely change your budget if goes up 3%-6%. Be careful.

If you are planning on a mortgage payment that is going to be at or higher than what you are renting for right now, you should not let it get higher than 33% or you're going to have to change your income.

So for a take-home of $5,000 a month you do not want your mortgage to go above $1,650 a month in payments.

If you get paid bi-weekly... you should be able to cover your mortgage payment and have money left over just out of ONE paycheck. That leaves your other paycheck you get in the month for all your other expenses... auto, credit card, utilities, gas, groceries.

If you are being paid bi-monthly and it takes MORE than one paycheck to cover your mortgage you will have budgeting problems any time something comes up, like a big repair bill or medical expenses.


You also want to know what will happen to you if you have a mortgage with balloon conditions in it, like an Interest-Only, ARM, etc. Those types of mortgages can be ticking time bombs if you do not plan ahead.

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By Jim Paulson, Owner/Broker,  Mon Jan 31 2011, 10:18

Buyers should always ask if there are any niche programs that might help them specifically. For example: first time home buyer programs, down payment assistance programs, community reinvestment programs, low - moderate income programs, etc.

I tell all my clients that they need to see if they are happy with what they qualify for in a home loan and if not, find out specifically what is holding them back (without over stretching) so they can fix their "weakest link".

Best of luck from Boise, Idaho!
Jim Paulson, CRS, GRI, EPRO, SFR
Owner/Broker - Progressive Realty Corporation

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By Fran Rokicki,  Sat Feb 26 2011, 13:31

I would suggest that you talk with a local banker or visit your credit union and find out what they have to offer you. Having that knowledge, you can then, go house hunting with a local Realtor. Finding that home will be so much easier when you have a plan in place. Good luck!

Fran Rokicki, Ct Broker~Mentor

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By JamesG0338,  Mon Mar 14 2011, 09:18

Along with these tips, I'd suggest finding an online mortgage calculator and seeing what different options would cost you. This type of software is also really good for first time home buyers. The calculator site that I've used before and recommended to my family and friends is http://www.mortgagecanadacalculator.ca . I got great results and everyone i recommended it to gave me good feedback as well :)

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By Home Buyer Help,  Mon May 2 2011, 16:11

The FHA 29/41 DTI has worked for decades. I'm a believer if it ain't broke don't fixed it.

29% of your gross income goes for principal, interest, taxes and insurance. (PITI) Then 41% of your gross income pays your PITI and other fixed costs like auto loan, credit cards, student loans etc.

This is a reliable formula. Lenders still use it to this day.

Home Buyer Help
Jeff Ragan

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By Zp,  Sun Aug 14 2011, 16:13

You folks sound knowledgeable and helpful. I've got a couple of questions that I'd appreciate your thoughts on:

--Do I qualify for a first-time homebuyer program if my first (and only) other property was jointly owned with an ex-husband? I'm now looking to buy as a single person.

--Is it ever possible these days to do a 10% down payment in Oakland? If so, what would I need to show? My credit score is not great right now due to high balances on revolving charges, but I'll be paying down my credit card debt signifiicantly before the end of the year.

Thanks!

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By Carmen Brodeur, Realtor & Attorney,  Fri Oct 28 2011, 13:33

I always like Suze Orman's basic caluclation - you shouldn't get a mortgage more than twice your annual income.

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By Labmyfamily,  Wed Nov 2 2011, 18:16

My husband and I been through bankruptcy 3 yrs ago we include our 2 properties and some credits debt.On that time we lose both of our job from a big known co.Now we're renting in a single home for 1,700 a mo. Plus utilities expense.Now my husbands has job and I'm still unemployed ..My parents live with us .My Dad is working.If we buy a house right now same on what we're paying now .Is it possible to be that my Dad will get approve and my husband?

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By Shawn Rosa,  Tue Dec 13 2011, 11:01

28% of take home pay is ideal.

during the height of the market (2004-2006), millions of people were at 50-60%

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By Shawn Rosa,  Tue Dec 13 2011, 13:40

buyers must learn to buy homes that they can afford, not the most expensive home they can qualify for.

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By Debra Minnie,  Wed Feb 1 2012, 21:02

We purchased a home in 05 and for 152000 and our payments with taxes,Ins, Flood were at 1600 a month and we only made about 44000 a year no wonder we had to file for bankruptcy and a year later now we are facing a foreclosure, how stupid to hold on this long and still lose everything....

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By Adrian Provost,  Mon Feb 27 2012, 16:54

Trulia is full of helpful information*

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By Eric Bell,  Sun Mar 18 2012, 12:16

Here's a helpful article as well: http://yobucko.com/housing/how-much-house-can-i-afford

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By Ref,  Tue Apr 3 2012, 15:38

I want to sell my house and purchase another one. Is there a way to just trade houses? What's my first step? What do I need to do to get going?

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By Stephanie Leon, 786-664-7710,  Sun Apr 29 2012, 17:56

Very Helpful info. Thanks for sharing.

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