The dream of home ownership can turn to a nightmare if you buy more home than you can afford. A budget for your housing expenses before you take out a mortgage helps protect your financial interests down the road. Your current financial situation is only part of the equation. Your future goals and potential changes in your situation also play a role in budgeting for a mortgage. Since you don't have a crystal ball to forecast future financial changes, give yourself a safe buffer by choosing a comfortable mortgage amount to increase the chances of making your home buying experience a success.
Evaluate your financial situation, including the amount you have for a down payment and the stability of your job. Determine how long you plan to stay in the area and similar factors that could affect the purchase of a home.
Calculate your monthly gross income by dividing the yearly salary by 12. Banks use this to determine how much of a mortgage you qualify for.
Review your current monthly budget. Total your other debts, such as loans and credit cards. Calculate how much money you have available for the mortgage payment, giving yourself a buffer to account for unexpected expenses.
Divide the home's annual property tax amount by 12 to estimate the amount you need to pay or set aside each month. For example, if the property taxes are $4,800 for the year, the monthly amount is $400. Add the calculated amount to the monthly budgeted mortgage amount.
Estimate the amount of your homeowners insurance premium. Call your insurance agent for an estimate if you have a specific home in mind. Add this amount to your monthly housing budget.
Add in the cost of private mortgage insurance (PMI) if your down payment is less than 20 percent and your lender requires it. Ask the lender for an estimate of the PMI.
Total the monthly costs associated with the home ownership. Divide that amount by your monthly gross income to determine the percentage of your income. The amount should be no more than 28 percent to meet the qualifications of most lenders.
Calculate the total of your other debts and the estimated housing payment. Divide this amount by your monthly gross income. This should be 36 percent or lower for the most affordability and to increase your chances of qualifying for a mortgage.
Write out a new monthly budget that includes all of the calculated housing expenses. Evaluate your ability to pay all of your monthly expenses based on the calculated housing costs. Lower your price range if you feel the cost is too high to afford comfortably.
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