Determining how big a mortgage you can afford involves calculating the percentage of your income that goes to your monthly payments. Traditionally, it's been said that you should spend no more than 28 percent of your gross monthly income on your mortgage payment, and this percentage is still used by lenders in determining loan approvals. Making a point to abide by the recommended percentage reduces the risk that you'll default on your mortgage.
Income and Credit Score
You'll need to determine how much income you have to find out whether you fit into the recommended category. Add up all sources of income, including bonuses and part-time jobs. Include only guaranteed income. If you have an excellent credit score with a spotless credit report, you may have a little wiggle room in terms of how much you can qualify for.
Write down all of your expenses and separate them into fixed or variable expenses. This will come in handy if you need to make any adjustments to meet the lender’s requirements, such as reducing or eliminating unnecessary expenses. All of your fixed items include expenses that are a must and that are about the same amount every month. This includes any car payments and other loans.
Figure out your debt-to-income ratio. This is the determining factor for lenders when they're deciding whether to approve a loan and for how much. To determine your debt-to-income ratio, divide your monthly expenses by your gross income. You'll come out with a decimal number. Convert this into a percentage, and you have your debt-to-income ratio percentage. For instance, if you make $5,000 a month and have financial obligations equal to only $1,500, divide 1,500 by 5,000 to come up with 0.30, or 30 percent. This is your debt-to-income ratio. Lenders typically want to see a debt-to-income ratio no higher than 36 percent.
Other costs that should be factored into the mortgage costs include taxes and insurance. Your property tax is a part of the mortgage, as is the homeowners’ insurance. These figures depend on the value of your home as well as where you live. CNNMoney.com reports that the national average for homeowner's insurance, according to the Insurance Information Institute, is $481 annually. For property taxes, CNNMoney.com's online calculator uses 1.5 percent of the purchase price of the home as a starting point for estimating annual costs, with the warning that property taxes vary widely. Factor in these figures to see if your mortgage costs still fit into the recommended percentage of your income.
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