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How Much Mortgage Can You Afford?

Allison Beatty
LoanBiz Columnist

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When shopping for a home, the first step is to determine the right price range. Beginning your search with a tour of homes that are later determined to be unaffordable only leads to frustration. To determine the right range for your situation, it is helpful to begin by taking a moment to understand each of the factors that mortgage lenders consider when they determining the size of loan they feel is appropriate to lend you.  Once you have a suitable price range in mind, it is a good idea to get prequalified for a loan of that size, as this will show realtors, builders and homeowners that you have a good chance of obtaining financing for the homes you are considering. 

Debt-to-Income-Ratio Key to Mortgage Limit

Mortgage lenders use several criteria when determining your mortgage limit. The amount of money you owe to other creditors is a major factor in determining how much more debt you can incur. Obviously, the lender wants you to have enough money to pay the home loan.

To calculate your monthly debt, make a list of all your non-housing bills and outstanding loans, including:
  • Automobile loans.
  • College loans.
  • Medical payments.
  • Spousal or family obligations, such as alimony or child support.
Then make a list of your housing expenses, including your mortgage, taxes, and insurance.

Income for Home Expenses

Your California lender also will compare your gross income (before taxes) to your home and non-home related expenses. The debt and income comparisons give the lender a ratio from which to base your mortgage amount.

Mortgage Ratios

To secure a FHA mortgage, your mortgage payments should be no more than 29 percent of your gross income. If you earn $45,000 per year, then that monthly mortgage limit is $1,087. Also, lenders typically require that your mortgage payments and non-housing expenses not exceed 41 percent of your income, for a total of $1,538. If you are not looking for a FHA mortgage, then use 28 percent for income and 36 percent for the total.

Non-Home Related Expenses

Among the common expenses considered "non-housing" costs are long-term debts for a car or student loan, alimony, or child support. If your non-home expenses total $800, then that amount would be added to your mortgage payments to see whether the total is less than 41 percent.

Other Mortgage Information

Mortgage lenders also consider additional financial criteria when deciding how much mortgage you can afford. Among the key items are:
  • Available cash for down payment.
  • Closing cost funds.
  • Credit history.
  • Employment history.

Know Your Limits

Lenders want to lend money. That is why they are lenders. So if a lender tells you that you should consider a smaller loan amount, or that you do not qualify for a particular loan amount, it is good to take their advice. Some consumers don't heed that advice, and instead visit more and more lenders until they find one willing to approve a loan that most lenders have denied. But that puts the borrower on the edge of affordability, which is not a good place to be. Living in a smaller home and having more money available for saving, investing, and paying for other things may be a better life than living in a larger home and always struggling with financial issues.

Practical Application

LoanBiz offers a prequalification calculator to assist you in the above calculations. Take a moment now to sanity-check your current assumptions. If it looks good, then this may be the right time for you to seek prequalification.

Source
U.S. Department of Housing and Urban Development


About the Author
Allison E. Beatty is a syndicated real estate writer who has been writing home improvement columns for 15 years.

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