Deciding what price house can I afford is a common question many of us ask when we set out to decide whether or now we should buy a home. We address this question for several reasons.
- First, you can answer this question from a manner of preference - how much am I comfortable paying per month for my home.
- Second, you can approach this question from what you can qualify for depending on what mortgage loan programs allow when they analyze all of your financial documents.
What Monthly Mortgage Payment Do I Want To Make?
Often what you can qualify to make in a monthly payment is different from what you want to make. Sometimes you can qualify to pay more and sometimes it happens that you do not qualify for as much as you want to pay. Either way, when you first start off deciding to buy a home or not, you should sit down and figure out what kind of payment you really want to make.
The worst thing you can do is be talked in to paying more than you feel comfortable because you technically on paper can afford more. If you get yourself into this situation you may cause yourself undue stress as you will constantly feel the pressure to have to come up with more money than you really wanted to for your housing payment.
What Monthly Mortgage Payment Can I Qualify For?
Closely tied to the house price you can afford, but not necessarily your payment preference, is the mortgage payment that you can actually qualify for based on mortgage loan guidelines. Conservatively, what you will find online about what you can qualify for is based on a housing payment to income ratio of 28-29% and a total debt to income ratio of 38-45%.
- Housing Payment to Income Ratio - this ratio compares your total monthly mortgage payment to your gross monthly income.
Total monthly mortgage payment equals: principal, mortgage interest, real estate taxes, home owners insurance, and possibly: flood insurance and PMI (private mortgage insurance.
- Total Debt to Income Ratio - this ratio includes all of your monthly debt payments compared to your gross monthly income.
Total debt is all of your monthly debt payments including your housing payment, credit card minimum payments, student loans, car loans etc. all addded up together.
Gross Monthly Income is your monthly income before taxes are taken out.
Other factors that you should consider in determining what kind of monthly mortgage payment if you qualify for much more than your preference is what you want to set aside for college savings, retirement planning, rainy day fund, etc.
Work closely with your loan officer in determining what house payment and home price you want before you start working with a real estate agent or start your home search. It will make searching a lot easier. Draw your upper limit boundaries and stick to them. Real estate agents and mortgage people have a tendency to want to push borrowers up because the more you buy and borrower the more agents and loan officers make.
Good luck and happy house hunting.
See our mortgage payment calculators.
