How do you figure out how big a monthly payment you can afford? (including interest)

Asked by Trulia Atlanta, Atlanta, GA Tue Jan 22, 2013

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11
Marc D'Angelo…, , Roswell, GA
Wed Jan 23, 2013
It is all about your debt ratio.The easiest thing for you to calculate this is take all of your debt that reports on your credit report and divide it by your income before taxes and this will give you debt ratio. The maximum you can afford on a Conventional loan would be equal to a total of 45% including your new mortgage payment. On a FHA loan in some instances you can take this up to 55%. I prefer to keep my clients in the low 40% range you you can have a life and you are not stuck with a giant payment. Call me at 404-925-8291 if you have any questions.
1 vote
Robert Robbi…, , Atlanta, GA
Wed Jan 23, 2013
Percentages is how we would "Qualify" you for approvals (not meant to guide you)with figures like Morgan's below, but you should never make you decisions on something like that. One of the contributing factors for the mortgage mess and foreclosures we saw for years all started, with mortgage lending based on that premise. Back then the question was 'How much can I afford to buy, what's the Maximum payment?' So instead of responsible lending, lenders would let you hang yourself by maxing out your debts vs your income.

The banking industry qualifies off your Gross income, the 1st thing everyone forgets is Uncle Sam is going to take 20%(+plus depending tax bracket) plus 5% for the state of Georgia. So out of 100% your already minus 25% if we qualified you in the old days at 50% you would only have 25% to live off of and hopefully put savings away. This may not be a problem for high wage borrowers but low to middle income families could quickly find themselves in trouble. Check this out...

High wage example -
120k / year = 10k per month minus 30+% (Higher tax bracket) leaves 70% if we let them credit qualify with all their Credit reported payments and a new house at 50% that leaves 20% to live off and save. in this case that's 2,000/ month this could be manageable.

Low wage example -
24k / year = 2k per month minus 20+% (Lower tax bracket) leaves 80% if we let them credit qualify with all their Credit reported payments and a new house at 50% that leaves 30% to live off and save. in this case that's $600/ month this could easily be a problem.

Here's a list of typical basic living expenses outside of credit cards, car payments and Mortages.
Electric 80-120/m(have friends with 300-400/m electric), water/sewer 40/m, Home Gas 50/m(some winters that could be over 200), Auto Gas 200+/m(if you live close or have a very fuel eff car), Auto Ins 100/m (depending on car and DL record), Medical/dental Ins 150-200/m(for an individual, families may exceed 500/M), Cable/Internet 140/m

Just using the lower of these items alone, We are over $850/m and we haven't bought groceries, entertained ourselves, saved, put money aside for eventual home repairs ect.... UPSIDE DOWN (basically they end up living on credit cards)

And this is why after 6-8 years of irresponsible lending customers not only lost their homes but racked up incredible amounts of debts, credit cards ect.. leading to the largest Bankruptcy and Foreclosure wave the World has ever known.

This is why I would never start a home ownership request of with a percentage based platform.

The 1st question I ask every customer is what do you want to keep your Mortgage payments at? This is usually followed by an answer like "Well my rent is 900 and I really don't wanna go much higher than that....." most of the time this is a figure that you have already been paying, had to budget for in the past ect....

Best Solution is tell us what you want for a mortgage payment and let us work backwards. You will always be happy and far less likely to end up as one of the statistics.

I hope that this has answered your question. Please feel free to call and ask anything additional.
Best Wishes,
Rob

Rob Robbins
Senior Mortgage Consultant
Cornerstone Mortgage Group
6151 Powers Ferry Road NW
Suite 610 Atlanta GA 30339
Office 678-578-7613
Cell 404-932-5353
rrobbins@cmghl.com
1 vote
J, Agent, Greensboro, NC
Thu Jan 24, 2013
Great answers here! PITI, principle- interest- tax- insurance come to mind when figuring monthly mortgage payments. As mentioned below, there are lots of variables to consider depending on the individual. PITI would be the short answer to your question when financing a purchase. Thanks Trulia!
0 votes
My NC Homes…, Agent, Chapel Hill, NC
Thu Jan 24, 2013
I'm with Sally English below. While you can easily find mortgage calculators online that can give you a quick down and dirty answer but there are several factors that will ultimately get considered by any lender when offering you a mortgage. The big three are Credit Scores, Income and Assets. But they will also consider your debt to income ratio.
0 votes
Sally English, Agent, Atlanta, GA
Thu Jan 24, 2013
I love the detailed answers below as they give great insight into how a mortgage loan officer makes this decisions. But as for advice - I would recommend simply calling a mortgage officer - lots of good ones right here on Trulia - and ask them that question. Have these documents in hand when you call
1. W-2 or 1099
2. Social security number
3. Maybe tax return from last year.

You should have an answer in about five minutes - it will be an estimate based on you meeting and providing the source documents to the loan officer (so you can get pre-qualified or pre-approved)

Then you will have a pretty good idea of where you stand when house hunting.
Web Reference:  http://englishteam.com/
0 votes
, ,
Wed Jan 23, 2013
All great answers. The one thing that wasn't discussed however is Self Employed Income. This is probably the biggest problem that loan officers face, especially those who don't know how to decipher a tax return. You'd be amazed how many loan officers don't know how to read a tax return. Throw in a Corporate tax return? Game over.

Whenever I get a call from a self employed person, he/she is quick to say, "I made $100,000 last year". Really? How much did you make the year before that? "$50,000". And then I ask, How much did you write off on your tax return each year? "I dunno". In that case, even if you make 1 million, if you write off 1 million, you got zero.

So, schedule C for self proprietor or LLC/LLP have a lot information that can be detrimental to their ability to buy a house. You can put costs in the depreciation and depletion box on the schedule C and lenders will count that back in as income. If you own a Corporation and work from home, you may be able to depreciate your home as well. Of course, talk to a CPA before doing this as the IRS will be looking for you to make a mistake. They need the money.

Schedule A also gets loan officers in trouble if they don't know what to look for. At the top of the schedule are employee deductions. If I made $30,000 last year but spent $10,000 on expense that the company didn't reimburse me, then I really only made $20,000. That cuts the maximum loan payment from $1250 a month to qualify down to $900 a month. Figure that for every $50 equals $10,000 of buying power, that's around $65,000 less ability to buy.

One client I worked with deducted 13 properties from his schedule E. The problem was that the properties were not his. So, this threw his loan out the window.

Before you file your return, have a loan officer look at it and make sure it qualifies you to buy a house. Just make sure the Loan Officer knows how to read a tax return.
0 votes
Morgan Campb…, Agent, Valdosta, GA
Wed Jan 23, 2013
The maximum housing/debt ratio is 31/43%. Your maximum allowed housing payment can be no more than 31% of your monthly gross income. Gross income is your income before taxes & other deductions. Your maximum allowed debt repayment can be no more than 43% of your monthly gross income. Debt repayment consists of your minimum payments for your credit accounts, car loans, other home loans, etc. If your monthly income is $1,000, your maximum monthly payment is $310. Your maximum debt repayment would be $430.

Morgan Campbell, NMLS#957183
Mortgage Banker
Envoy Mortgage NMLS#6666
Mobile 229-563-5903
Email mcampbell@envoymortgage.com
http://www.ValdostaMortgages.com
Web Reference:  http://ValdostaMortgages.com
0 votes
Morgan Campb…, Agent, Valdosta, GA
Tue Jan 22, 2013
To get your maximum allowed monthly payment, multiply your gross monthly income by 36%. If your gross monthly income is $1,000, you qualify for a monthly payment of up to $360.
Web Reference:  http://ValdostaMortgages.com
0 votes
Lee Taylor, Agent, Decatur, GA
Tue Jan 22, 2013
Good answer, Fred.

Hire a mortgage lender for a direct, specific consultation on this matter.
Web Reference:  Http://intowninsider.com
0 votes
David Herren, Agent, Atlanta, GA
Tue Jan 22, 2013
Standard lending guidelines will say you can spend this or that percentage of your income on your mortgage payment, but that means nothing if it does not leave enough money to pay for the rest of the things you need in life; food, clothing, transportation, health care, fun stuff, you get the idea.

What to do? Create a budget that accounts for everything you spend in one year. Everything. Include something for savings and subtract all of it from your annual income. Divide the remaining amount by 12, and there you go. That is what you can spend on housing.

Now go to a lender and tell them what you found, give them all the information they ask for, all of it, and they will tell you how much you can borrow.

On that savings thing, set aside some for emergencies, and some for a down payment. The more you can put down, the better the terms you will get, but cover the emergencies first.

All this assumes you don't have crushing credit card debt or some other kind of debt you cannot manage. Only the Federal Government can run a deficit, the rest of us have to pay our way.

Best,

Dave Herren
Best Atlanta Properties
404-425-4945
0 votes
Fred Yancy, Agent, Woodstock, GA
Tue Jan 22, 2013
Rent vs Own: How Much Mortgage Can I Afford?
Not only does owning a home give you a haven for yourself and your family, it also makes great financial sense because of the tax benefits — which you can’t take advantage of when paying rent.

The following calculation assumes a 28 percent income tax bracket. If your bracket is higher, your savings will be, too. Based on your current rent, use this calculation to figure out how much mortgage you can afford.

Rent: _________________________
Multiplier: x 1.32
Mortgage payment: _________________________
Because of tax deductions, you can make a mortgage payment — including taxes and insurance — that is approximately one-third larger than your current rent payment and end up with the same amount of income.

Fred Yancy, Broker
Crye-Leike Realtors
(678) 799-4663
http://fredyancy.crye-leike.com
0 votes
ATT

This is BRUCE LOAN HOME a private loan company, We are offering out loans at a low rate of 3%. Both secured and unsecured, and I want you to understand the fact that getting Loan from this Loan Company is 100% Rest assured and the Legitimacy of this Transaction is Guaranteed. If you are interested, fill the information below to enable us proceed. Contact us via email';, (bruceloanhome@gmail.com).

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