This is one of the more popular questions that receive from prospective borrowers. When it comes to purchasing a home, it makes sense to see exactly what you can afford and still be comfortable. The worst possible outcome is to buy a home that is too expensive, leaving you with very little chance to add to your emergency fund and savings. However, you also don’t want to buy a home that doesn’t meet your criteria because you aimed too low for what was possible.
The best way for you to do this is with a mortgage calculator that includes your income or salary information, property taxes, monthly debt payments, interest rates based on credit scores, and a down payment slider. For the sake of simplicity, we want to target the 20% down payment so that we can avoid adding private mortgage insurance to our monthly mortgage payments.
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One Part Of The Equation is Salary
A huge indicator of how much house you’re able to afford is your annual income. More importantly, you want to find out exactly how much you make each month after taxes, which is your net income. You do not want to use your gross income, which is your income before deductions and taxes for this next step specifically. However you will need your gross income to determine what your debt to income ratio is.
If you are living with an adult over the age of 18, you can use your household income. With this, we can help narrow down your total monthly expenditures to find out exactly how much mortgage you can afford to pay for. This is a good time to take a look at how much your down payment can be.
What Is a Comfortable Down Payment?
When looking into buying a house, you should compare how much of a down payment you can make on the home. Your down payment is the amount you’ll be putting towards your house at closing. The comfortable number for conventional loan programs is 20 percent or more, which allows you to omit needing private mortgage insurance thus lowering your monthly payments.
While 20 percent down payments are the industry “standard,” you can put more down if you choose to. In fact, it will make a much larger difference if you choose to save up around 40 percent for a down payment. While this option isn’t for everyone, this can help ensure that your mortgage payment stays relatively inexpensive for you in the long term.
A quick example for help determining the down payment is:
- You want to do a 20% down payment on a $250,000 house.
- Multiply the price of the home ($250,000) by 20% (0.20)
- $250,000 x 0.20 = $50,000.
- You would need to bring a $50,000 down payment for a $250,000 house.
- A 40% down payment would be $100,000 for the same $250,000 house.
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If a high down payment is not for you, I’d recommend either waiting until you can afford a 20 percent down payment on a home, or choosing a loan program where a lower down payment is acceptable.
Add Up All Of Your Current Monthly Debt Payments
You should use the money that you actually are bringing home and putting into your bank account. Having this number will make it easier to make sure you aren’t going over what you can actually afford in a mortgage. Now that you have this number, you should figure out your current debt payments. These debt payments can include any child support paid, student loans, car loans, and credit card payments. Do not include your current rent in as a debt if you are currently living in an apartment since your rent payment will no longer exist when you buy a home!
All of your debts need to be added together and then subtracted from your monthly net income. This will give you a solid idea of exactly how much money that isn’t tied to anything. Keep in mind that this amount is not your mortgage payment because you need to be able to save money for food, entertainment, and for your savings.
Most people strive to bring home 70% of their monthly income after all of their debts. This includes your mortgage payment. This means that your mortgage payment with your debt payments included should not take more than 30% of your monthly income. An easy way to find out what percentage of income you’re bringing home each month is to calculate your debt to income ratio.
