Here are some guidelines from the mortgage industry to help you understand how much money you may qualify for in a mortgage. Remember that there is a difference between what you qualify for (how much money a lender is willing to give you) and how much you can afford (based on your lifestyle). Experts agree that your monthly mortgage payment should not exceed 28% of your total gross monthly income. Here’s how to calculate your maximum monthly mortgage payment:
Maximum Monthly Mortgage Payment = (Annual Salary x .28 %)/12
Your mortgage payment is composed of PITI:
Principal of your mortgage + Interest on the mortgage + Taxes on your property + Insurance on your home and mortgage (if any)
Anna has an annual salary of $39,000/year and a down payment of $8000. Let’s determine her maximum monthly payment.
($39,000 x .28%)/12 = $910
Anna should not have a monthly payment that exceeds $910 per month. This must include PITI as well as the homeowner’s association fee (if any). Using a mortgage calculator, we can see that Anna’s monthly payment would be $811 for a $100,000 home, considering the following:
Mortgage: 30 year fixed
Mortgage rate: 6%
Insurance: $600
Taxes: $1000
PMI: $708
HOA: $800
Downpayment: $8000
Anna can afford this home. She can actually afford to spend about $113,000.
Your total monthly debt payments, including mortgage, car loan, student loans and credit card debt payments should not exceed 36% of your gross monthly income. That means that if you are currently paying 20% of your monthly income toward nonmortgage debt, you should not look at a monthly housing payment that exceeds 16% of your remaining income (36%-20% = 16%).
If Anna’s auto, student loan and credit card payment comprise 20% of her monthly income, her mortgage payment should be around $520 per month. In this scenario, that’s a $58,000 home. In order to increase the amount of money available for a mortgage, Anna should consider paying down some of her debt.
By buying an affordable home, you will have more money in your pocket every month FOR 15 TO 30 YEARS! You can give yourself “a raise” EVERY MONTH for the length of your mortgage by buying a property that you can comfortably afford.
Use our How Much Home Can I Afford Calculator to see how your income, expenses, down payment and interest rates affect your monthly payment and affordable purchase price.