Determine How Much Home You Can Afford

Before you speak with a mortgage lender, it’s useful to calculate how much house you can afford on your own. A lender will tell you how much money you qualify for, but you want to make sure you won’t be overextending yourself by determining your budget and what you realistically can afford to spend on mortgage payments each month.

When determining how much house you can afford, you should use the 28/36% rule of thumb, which stipulates that you should not spend more than 28% of your gross monthly income on housing expenses (your salary before taxes) and 36% on your total monthly debt payments.

Your housing expenses are your monthly mortgage payment, which includes:

Principal: The money that you borrowed to purchase your home.

Interest: The fee that the lender charges you to borrow the funds.

Taxes: The property taxes that you’re required to pay the government based on the value of your home.

Insurance: The homeowners insurance that protects your home against any damages.

Association dues: The fee you must pay if your home is part of a homeowners association. Note that if your home is not part of a homeowners association, you will not be required to pay this fee.

To calculate how much home you can afford, you can use the Home Affordability Calculator or do the following calculations yourself:

Maximum Monthly Housing Expenses = (Gross Monthly Income X 28) / 100

Maximum Total Monthly Debt Payments = (Gross Monthly Income X 36) / 100

But, once you’ve determined how much you can afford, be sure to consider the lifestyle that you want to maintain and leave yourself a cushion in case of emergencies.