4 Tips to Determine How Much Mortgage You Can Afford

1. The General Rule of Mortgage Affordability
As a rule of thumb, you can typically afford a home priced two to three times your gross income. If you earn $100,000, you can typically afford a home between $200,000 and $300,000.

To understand how that rule applies to your particular financial situation, prepare a family budget and list all the costs of home ownership, like property taxes, insurance, maintenance, utilities, and community association fees, if applicable, as well as costs specific to your family, such as day care costs.

2. Factor in Your Down Payment
How much money do you have for a down payment? The higher your down payment, the lower your monthly payment will be. If you out down at least 20% of the homes cost, you may not have to get private mortgage insurance, which costs hundreds of dollars each month. That leaves you with more money for your mortgage payment.

The lower your down payment, the higher the loan amount you'll need to qualify for and the higher your monthly mortgage payment .

3. Consider Your Overall Debt
Lenders generally follow the 28/41 rule. Your monthly mortgage payments covering your home loan Principal, interest, taxes and insurance shouldn't total more than 28% of your gross annual income. Your overall monthly payments for your mortgage plus all of your other bills like car loans, utilities, and credit cards shouldn't exceed 41% of your gross annual income.

Here's how that works. If your gross income is $100,000, multiply by 28% and then divide by 12 months to arrive at a monthly mortgage payment of $2,333 or less. Next, check the total of all your monthly bills including your potential mortgage and make sure they don't top 41%, or $3,416 in our example.

4. Use Your Rent as a Mortgage Guide
the tax benefits of home ownership generally allow you to afford a mortgage payment- including taxes and insurance-of about one-third more than your current rent payment without changing your lifestyle. So you can multiply your current rent by 1.33 to arrive at a rough estimate of a mortgage payment.

Here is an example. If you currently pay $1500 per month in rent, you should be able to comfortably afford $2000 monthly mortgage payment after factoring in the tax benefits of home owner ship.

However, if you are still struggling to keep up with your rent, consider what amount would be comfortable and use that for the calculation instead.

Also consider whether or not you'll itemize your deductions. If you take the standard deduction you can't also deduct interest payments, Talking to a tax advisor, or using a tax software program to do a "what if" tax return, can help you see your tax situation more clearly.

Article from houselogic.com
by G.M Fjiisko