How Much Mortgage Can I Afford?

There are two basic formulas commonly used to determine how much mortgage you can reasonably afford. These formulas are called qualifying ratios. They estimate the amount of money you should spend on mortgage payments in relation to your income and other expenses. It is important to remember that the following ratios may vary and each application is handled on an individual basis. The guidelines are just that - guidelines.

There are many affordable programs, both government and conventional, that have more lenient requirements for low and moderate-income families. Many of these programs involve financial counseling and, in return, offer more lenient requirements.

Generally speaking, to qualify for conventional loans, your proposed house payment should not exceed 28-32% of your gross monthly income. For FHA loans, the ratio is 29% of gross monthly income. Monthly housing costs include the mortgage principal, interest, taxes insurance, and private mortgage insurance if applicable (often abbreviated PITI). For example, if your annual income is $30,000, your gross monthly income is $2,500, multiplied by 28% = approximately $700. So in this example, you

would probably qualify for a conventional home loan that requires monthly payments of $700.

Any expenses that extend eleven months or more into the future are termed long-term debt, such as a car loan. Total monthly costs, including PITI and all other long-term debt, should equal no greater than 38-40% of your gross monthly income for conventional loans. Using the same example, $2,500 x 38% = $950. So the total of your monthly housing expenses plus any long-term debts each month shouldn't exceed $950. For FHA the ratio is 41% for total monthly costs. One way to determine your appropriate housing expense is to compare your monthly income with monthly long-term obligations and expenses.

HOWEVER, with the advent of automated underwriting, these debt to income ratios can often be exceeded with the presence of compensating factors such as high credit scores, available liquid assets, low loan to value et. al. Total debt to income ratios approaching 60% are not unheard of.

Homeowner's insurance or property insurance is another cost you will have to consider. The lending institution holding the mortgage will require insurance in an amount sufficient to cover the loan. However, to protect the full value of your investment, you might want to consider purchasing insurance that provides the full replacement cost if the home is destroyed. Some insurance only provides a fixed dollar amount, which may be insufficient to rebuild.

When estimating how much mortgage you can afford, please contact a mortgage professional at SCR or ALIANT Mortgage to help you. When budgeting to buy a home and determining how much of a mortgage you can afford, it is important to allow enough money for additional expenses such as maintenance and insurance costs. If you are purchasing an existing home, gather information such as utility cost averages and maintenance costs from previous owners or tenants to help you better prepare for homeownership, even though these costs are not included in the calculation ratios.