How Much House Can You Afford?
The
amount of loan for which you qualify is based on two different
calculations. Using what are known as qualification
ratios, lenders evaluate your income and long-term
debts to determine a "safe" amount for your
mortgage payments. A fairly standard ratio is 28/33. Certain
mortgage plans sometimes use more liberal ratios - for
example, the FHA currently uses 29/41.
Here's how it works: With a 28/33 ratio,
you'd be allowed to spend up to 28% of your gross monthly
income for mortgage payments. The lender will then run
a different calculation. This one is your loan payment
and debt payments combined, which may not exceed 33%
of your gross monthly income. To calculate exactly how
much you may borrow, you also need an estimate of current
interest rates.
For Example: Suppose you had $1,000
a month for mortgage payment; at 7% that would let you
borrow about $160,000 on a 30-year loan. At 6% the loan
amount would be nearly $175,000. If your rate were 8%,
the loan amount would be a bit less than $150,000.
As part of this calculation, you also
need to estimate and include the property taxes, homeowner’s
insurance, and Homeowner Association fees (if applicable)
you might need to pay, which are considered part of
your monthly expense.
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