You can spend hours and hours searching the interwebs for your dream home. Falling for homes currently listed is easy, with beautiful pictures to draw you in. But have you determined how much home you can actually afford?
The general rule of thumb is that you can buy a home that costs about two-and-one-half times your annual salary. But when I say rule of thumb, that’s all it is. A lender will determine the actual amount you may borrow based on your income, outstanding debts, credit score, down payment and savings. Factors specific to the home (such as taxes, insurance, and association fees) will effect your monthly payment.
I always recommend that home shoppers get prequalified with a lender before getting too deep into the process. It’s relatively quick and painless and will save you time and heartache. A pre qualification is purely informational and does not obligate the lender. It’s an opinion, based on unsubstantiated information. It will help you to set search parameters but it will not get you a loan.
All that said… if you want to figure out on your own what price range you should be looking at, you can easily use a free mortgage calculator to plug in your numbers and get a general idea. I have one on my website HERE, it’s user-friendly, confidential (no data gets saved or shared) and there’s no lender advertisements to clutter the process.
A quick and dirty calculation looks like this:
Start with gross, or before-tax, household income. Regardless of what you take home each month, your lender will always want to know your salary before any withholdings.
Subtract monthly debt from your gross income. This debt includes rent or mortgage payments, car payments, child support, credit card debt, student loans and other kinds of loans. This does not include other monthly expenses such as utility bills or gas for the car.
While your mortgage professional will give you the exact numbers you will use to qualify, a good rule of thumb is to keep your payments between 40% and 45% of your gross income, less expenses.
For example, if your gross income is $3,000 a month and you have car payments and credit card balances for a total debt of $500 a month, your usable income is $3,000 minus $500, or $2,500 a month. Taking $2,500 x 40% and 45%, you arrive at a total mortgage payment between $1,000 and $1,125 per month.
This payment amount (the $1,000 to $1,125 in our example) is meant to cover the mortgage payment, taxes and insurance.
Use this home affordability calculator to determine how much of a mortgage you may be able to obtain. If you’re ready to go a step further and get pre-qualified, give me a call and I’ll put you in touch with a lender for a no-obligation consultation.