Chapter 1: Calculate How Much Home You Can Afford
A great place to start is to understand the price of home that you can afford.
Keep in mind that there is often a difference between the amount of loan you qualify for and how much debt you can comfortably take on. In other words, just because you can, doesn’t mean you should.
For qualification purposes, traditionally, most lenders have required that total housing costs not exceed 33 percent of gross monthly income, and total debt payments per month (including the mortgage) not surpass 38 percent. Therefore, if you owe nothing and earn $40,000, according to a lender, $1,100 in housing costs would be within your range. If you make $80,000, you might be able to qualify for $2,200. In recent years, however, many lenders have been more flexible with the percentage of income allowable toward housing costs, some even into the 40-50% range.
The down payment you make and type of financing you receive are key factors to consider when figuring out the price of home you can purchase. Table A illustrates the difference these variables make in monthly housing costs for a $150,000 home and a $350,000 home.
Table A |
A |
B |
C |
D |
E |
| Home Value |
$150,000 |
$150,000 |
$350,000 |
$350,000 |
| Down Payment |
$30,000
(20%) |
$15,000
(10%) |
$70,000
(20%) |
$35,000
(10%) |
Financing
(30-yr., fixed) |
6.5% |
7% |
6.5% |
7% |
Principal and
Interest |
$750 |
$898 |
$1769 |
$2095 |
Property Taxes
(est. 1.25%) |
$155 |
$155 |
$365 |
$365 |
Homeowners
Insurance* |
$125 |
$125 |
$165 |
$165 |
Monthly Housing
Costs (PITI) |
$1030 |
$1178 |
$2299 |
$2625 |
*Projected figure for single family home with standard construction. Rates depend on such factors as location and deductibles.
To know how much you can really afford to spend on housing costs, complete the following worksheet. List all of your current expenses in the Current column. The figure you are presently spending on housing costs and other expenses will help you determine how much mortgage payment you can comfortably afford.
Example: You currently spend $1,200 on housing costs, have $15,000 for a down payment, and can get a mortgage loan for seven percent. Based on Table A; column C, a $150,000 with a $1,178 mortgage payment may be within your price range.
If, after completing the budget worksheet, you find that you do not have enough to purchase, or that you would like to buy a more expensive home, consider making adjustments to your budget. In the Proposed column, list projected changes to your expenses and income. Be conservative and realistic. You may be able to change your circumstances enough to make the dream of homeownership a reality.
Download the Monthly Budgeting Worksheet (PDF)
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