Figure Monthly Payments
What Can You Afford?
Give or take a few thousand dollars it is easy to find out how much home you can afford because there is a popular formula that the vast majority of lenders use to qualify home buyers. This formula is published free on the Internet by the U.S. government's home-focused agency- HUD.
The Department of Housing and Urban Development (HUD) is an organization that is designed to make the dream of home ownership possible for anyone willing to make the effort. Under HUD's umbrella is the Federal Housing Administration (FHA) which provides the formula for you to follow. The FHA is a federal insurer that insures most conventional loans so that lenders will be more willing to loan money.
Income / Mortgage Payment Ratio
If you want to determine how much home you can afford to buy there is a two step process beginning with your monthly gross income and then second, your TOTAL long term debt. The table below illustrates the formula:
Although the chart above tells you how much 29% of your monthly income is, you can also arrive at the same figure by taking your gross monthly income and multiplying it by .29 or 29%. The figure you get is approximately how much you can spend on a mortgage payment that includes principal, interest, property taxes and homeowner's insurance.
Income / Total Debt Ratio
If your monthly house payment (including escrows) combined with your other long term indebtedness exceeds the allowed amounts then your ability to borrow the maximum amount for a home may be decreased. As an example let us assume that your annual income is $45,000 which would normally let you qualify for a monthly housing payment of $1,088.00 including principal, interest, taxes and insurance. If the $1,088.00 monthly payment combined with your other long term debt exceeds the ratio's above then the 29% housing allowance may be decreased accordingly.
Other items which are considered long term debt would include but not be limited to car payments, boat payments, school loans, child support, credit card monthly minimums, etc. Not included are your normal monthly expenses for utilities, auto insurance, food and clothing.
In order to qualify for the maximum housing payment, the table below will give you an idea of how much additional long term indebtedness you can have when obtaining a conventional loan (total monthly debt service of 36%).
Keep in mind that these are merely guidelines used by Lenders and there are always exceptions. Also remember that the above table assumes a "Conventional" loan and the total allowable Long Term Debt on FHA and VA loans is up to 41%.
When you have determined your monthly payment you can click the following link to Determine a Purchase Price Range For Your New Home.