How Much House Can I Afford?
Here at Patriot Home Mortgage, we have tons of resources to help you understand how large a mortgage you can afford. Check out our mortgage calculator page for Payment/Amortization, Rent vs. Own, APR, Debt Consolidation, and more.
In today’s blog post, we’re walking you through the factors that influence how to determine how much house you can afford. Buying a house will most likely be one of your biggest financial decisions, and figuring out how much you can afford is the first step in the process. Doing so helps you limit your house search to realistic options and helps avoid disappointment when you find a house you love and then realize when you apply for mortgage financing that it’s not a feasible option.
Continue reading to learn more, and if you’d like to talk with one of our mortgage professionals, contact Patriot Home Mortgage in St. George or Mesquite.
Maximum Mortgage & Total Housing Costs
A good rule of thumb for determining how much home you can afford is that your monthly payment should not exceed 28 percent of your gross monthly income. However, your mortgage isn’t the only housing payment that you’ll be making each month. You’ll also need to factor in homeowner’s insurance, private mortgage insurance, homeowners association fees, and property taxes. Combined, this should not exceed 32 percent of your gross monthly income.
Other Debt Payments
Along with your mortgage, you most likely have other debt payments, such as auto loans, student loans, and credit card payments. Everyone will have a different amount of debt, and when you’re deciding to purchase a house, it’s important to take these debts into consideration. Your mortgage company and lender will also factor these debts into the type and amount of money they are willin gto lend you. A good rule is that your total debt payments shouldn’t exceed 40 percent of your gross monthly income. So if you have a big car payment, a lot of student loans, or high credit card debt, you’ll need to adjust the size of the mortgage payment you can afford.
Mortgage Lender’s Ratios
The first thing to know when starting the mortgage process is that you’re not so much limited by the price of the home, but the size of the mortgage and fees you can take on. Mortgage lenders typically use two methods to calculate how much they’re willing to lend you, and these are called ‘front-end ratio’ and ‘back-end ratio.’ The front end is simply your mortgage payment as a percentage of your gross income. The back-end ratio is your total monthly debt (credit card, student loans, car payments, etc.) as a percentage of your gross income. Depending on your credit situation, income, and lender’s policies, these percentages can be higher or lower, and will affect the size of your mortgage.
Calculate An Affordable Mortgage
After you have a better idea of how large of a monthly mortgage payment you can afford, you’ll be able to figure out how much house you can actually buy. While you won’t know what interest rate you’ll receive until you talk to a mortgage company like Patriot Home Mortgage, you can estimate your budget. If you take the average 6 percent interest rate on a 30-year fixed-rate mortgage, your payments will be around $650 for every $100,000 borrowed. Divide your monthly mortgage payment budget (as determined by your gross income minus debt, as outlined above) by 650. Then multiply that number 100,000. This will give you an idea of how much your maximum mortgage amount will be, and the price of the home you should be looking for.
Need Personalized Mortgage Help? Contact Patriot Home Mortgage
We hope that this blog post helped clarify how to calculate your home buying budget. However, we know mortgage math is probably a bit complicated for those who are new to the process! If you’ve found yourself more confused, then contact our mortgage company. We’d be more than happy to talk with you about your mortgage financing options and help you create a home buying budget. Contact us in St. George, Utah or Mesquite, Nevada today. We provide services for conventional mortgages, VA loans, USDA loans, jumbo loans, reverse mortgages, and more.