Date: November 29, 2016<\/p>\n
Owning a home is part of the American dream \u2013 a place of your own where you can raise your kids and your grandchildren can come to visit. Part of that dream might be reaching for the stars to buy the biggest and the best, but your income and budget might make that hard to do. So how much house can you afford? Here are a number of methods that can help you figure it out.<\/p>\n
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Let Someone Else Do the Work<\/strong><\/p>\n Determining how much house you can afford to buy doesn\u2019t have to be a calculation you must do on your own. \u201cThe home-buying process can actually begin with a mortgage representative up to a year before even looking at homes,\u201d says Maria Sacco Handle, a sales representative with Berkshire Hathaway HomeServices and Prudential Fox and Roach in Brigantine, New Jersey. \u201cThe mortgage rep will look at the buyer\u2019s entire financial profile and let him know how much house he can afford and how soon he can buy,\u201d notes Sacco Handle.<\/p>\n If you\u2019re not quite ready to talk to a mortgage rep \u2014 maybe you\u2019re more curious about what’s out there than driven to buy in the immediate future\u2014 the Internet abounds with free mortgage calculators where you can plug in your pertinent information to get an idea of what you can afford.<\/p>\n \u00a0<\/p>\n Calculation Basics<\/strong><\/p>\n Most Internet calculators base their formulas on the premise that you\u2019ll be taking out a 30-year loan<\/a> at whatever the prevailing interest rate is at the time. They include 1 percent for property taxes and 0.4 percent for property insurance. If rates in your area are higher or lower than these figures, you\u2019ll probably get a more accurate forecast from a local mortgage representative.\u00a0<\/p>\n Calculators do not typically include private mortgage insurance, which is often an added expense if you can\u2019t come up with a down payment of at least 20 percent of the purchase price. Calculators also tend to focus on the amount of your mortgage, not on the numerous other expenses you\u2019ll have to cover when you buy a house. You’ll need to plan for additional expenses such as mortgage application fees and closing costs.<\/p>\n \u00a0<\/p>\n How Much Can You Dedicate to the Mortgage?<\/strong><\/p>\n Do some math on your own if you don\u2019t want to take the word of a mortgage representative or use an Internet calculator. Sit down with your monthly budget<\/a> and tally up what you spend on car payments, credit cards and student loans. Include other must-pay monthly expenses such as childcare costs, insurance premiums and savings toward education or retirement.<\/p>\n Add mortgage payments and other expenses of home ownership to your mandatory budget items. Lenders want to know that the total represents no more than 43 percent of your gross income before taxes. Some calculators use a percentage of only 36 percent.\u00a0<\/p>\n If you earn $80,000 a year, 43 percent works out to $34,400 or $2,867 a month. Then subtract the other monthly expenses and debts you must pay from this figure. What you\u2019re left with is how much you can dedicate to mortgage payments. Studies have shown that borrowers who commit to paying higher percentages of their income than these often will have problems making their mortgage payments. After all, you must still buy groceries, pay taxes and fund other living expenses from your gross income.<\/p>\n \u00a0<\/p>\n