How Much Home Can I Afford?
Before you start looking at great rooms, gourmet kitchens, and big back yards, your home search should begin with an honest assessment of how much you can spend on a home. Determining your maximum price point might not be as fun as touring homes, but it will provide a sense of confidence so that when you do find a home you love, you’ll be able to make it yours.
The loan amount you’ll be eligible to borrow will be contingent on your credit history, debt-to-income ratio and other qualifications specified by your lender.
To get a more realistic idea of exactly how much home you can afford, try the dynamic Home Payment and Price Calculator. This step-by-step process will help you think through your monthly expenses and income to determine the mortgage amount you can comfortably afford.
Do the Math
Consider all sources of income you have. In most cases, if a person is contributing income towards the qualification of a mortgage application, that person must be an applicant or co-applicant on the loan in order for you to consider them as a source of income.
Next, you’ll need an accounting of all monthly, quarterly, and annual expenses and debts. Car loans, credit cards, student loans, child support, and alimony should all be tallied. Then, looking back over a year’s history (ideally), determine the total amount you spend on living expenses, such as groceries, utilities, entertainment, and fuel. Do not include the amount you are currently paying in rent or renter’s insurance. (You can use Budget Calculator function to help tally the total.) Be honest! Fudging on the amount you spend each month eating out won’t make it easier to make mortgage payments each month.
After subtracting your debts and expenses from your net income, you’ll have a balance that will help you decide what a comfortable monthly payment might be. Remember, this payment must include homeowners insurance, taxes, and private mortgage insurance (PMI), if necessary.
Once you have your affordable monthly payment amount, it’s time to reveal the price of homes for which you should be hunting. Using the Home Payment and Price Calculator, you can plug in your payment amount, along with a few other variables (down payment, taxes, insurance fees, and mortgage rate). Within seconds, you’ll have your targeted price range for your new home. After you’ve plugged in the numbers and determined your budget, it’s a good idea to get pre-approved for a mortgage. Knowing your loan amount will make it even easier to shop for the perfect home in your price range.
Mortgage calculators and getting pre-approved take the guesswork out of determining what you can afford. And what if you’re not happy with the results? Perhaps it’s time to pay off debt or start a new savings habit by cutting out extra indulgences—even a little bit of belt-tightening can help you save toward your dream home.