How Much Mortgage Can I Afford?

A home, whether suburban house, urban condo, or rural ranch, is the largest purchase most Americans will ever make. Now that the country is starting to recover from the booming and busting of the housing market, it's time for reasonable financial planning to successfully afford a home.

A General Rule

There is no absolute formula to determine what size home loan an individual or couple can afford. There is, though, a general rule-of-thumb that can help you tell if you are ready to start looking at homes for sale. Divide your monthly take-home income number by four. If you and a spouse or partner are going to legally buy a home together, then include their monthly take-home income as well. The resulting total is roughly the maximum monthly mortgage payment, including property and other taxes, that you can comfortably afford. If you bring home $4,000 a month, then you can afford a home with a mortgage payment of $1,000. If you make $2,000 a month after taxes, you can afford a home with a monthly payment of $500.

Another way of estimating what you can afford is to multiply your annual income by 2.5. If your annual income is $50,000, your price limit for a home would be $125,000.

Generally speaking, you should not pay more than 28 percent of your gross income for housing costs, which includes the loan payment, property tax, home owner's insurance, and estimated utility costs.

This rule-of-thumb is very general, and does not account for a variety of earning situations and lifestyles. It is only meant as a rough guide for you to determine whether you are ready to begin your process of buying a home.

Talk with an Accountant

Unlike most purchases, buying a home usually takes years to pay off, and involves interest rates, fees, and taxes that are vital to consider. You do not need an accountant or financial planner to buy a home. However, hiring one for a single meeting to clarify the financial details of home buying and to determine your financial goals and limits would be helpful. A good accountant can help you take stock of your existing income and expenses and apply that cash flow to the purchase of a home. You may find that you cannot realistically afford to buy a home that is large enough to meet your needs. On the other hand, you may discover that buying a home will result in a monthly payment that is lower than your rent check.

Shop Around

If you think you are able to afford the purchase of a home, it's time to shop around - not for a home, for a lender. There are many lending institutions, from local credit unions to national even international banks, that are looking for your business. Talk with your friends and family to get their experience with lenders. You may already have a savings or checking account with a bank that also offers home mortgage loans. Sometimes working with one institution for many of your banking needs can simplify your financial concerns. On the other hand, a different lender might offer a lower lending rate or lower fees.

Once you choose a lender, you may want to talk with one of their agents - even before you have found your dream home. When working with a lender, you will fill out financial statements and have your credit record checked. With your information, the lender can help you understand how much that lender will loan you toward the purchase of a home.

Working with a Lender

A mortgage lender will help you sort out the interest rates, taxes, fees, and monthly payments. Many people simply rely on the information provided by the lender to determine the viability of buying a home. Though you can buy a home with only the lender's perspective, it's important to understand the limits of a lender's position. Though lenders are now more careful than in years past to see if a home purchase fits within a prospective buyer's budget, they are looking at that equation from their perspective, not yours. A lender may approve a loan for you without knowing all the factors of your finances. Just because a lender approves your loan doesn't meant that you can actually afford it. And, any individual lender, like any other business, wants your business. They are not going to steer you toward a better interest rate or service provided by a competing lender. A lender's job is to simply determine if you qualify for a loan and get you to borrow from them if you do.

Shop Around Again

So, where is the dream home you can afford? To get an idea of where you want to and can afford to live, read through listings of homes for sale and shop open houses to get a feel for various neighborhoods and home styles. Generally, neighborhoods located closer to urban centers have homes with prices that are higher than those located in suburban or rural areas. That is, a home in an urban setting will likely cost more than a similar kind of home of the same size in a suburban location.

Ready for Home

You have done your homework. You have calculated your earnings and expenses. You have talked with an accountant, if only once or twice. You have found a lender that you like that offers a great lending rate and low fees, and that has helped you identify the range of loan they can offer you. You have scanned listings and have visited a few neighborhoods to see if you can afford to live where you really want to live. If you have done all of this planning, you have in fact done more than most homebuyers and know just how much house you can afford. Now, you are ready to talk with a real estate agent and find your dream home.

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