Whether you’re looking to make the jump from renting to owning or looking to upgrade your home, your first step should be determining what you can afford, both in terms of a down payment and for your monthly mortgage payment going forward. When determining what you can afford, you must consider not only the mortgage payment but also any other debt costs and other homeownership costs. While you should always make sure that you can afford your home based on your personal budget, lenders have general guidelines they use to make sure you can repay your mortgage.
TL;DR (Too Long; Didn't Read)
The amount of income you need to set aside for your mortgage varies, but is typically between 28 and 35 percent.
Mortgage Payment Percentage
By law, lenders are prohibited from making mortgages that take up more than 35 percent of your monthly income. For example, if your monthly salary is $4,000, your mortgage payment can’t exceed $1,400. However, lenders are usually more conservative than the federal limit, typically sticking around 28 percent of your salary. So, a $4,000 salary will usually qualify you for no more than a $1,120 monthly mortgage payment. If you have an FHA mortgage, your lender could go up to 31 percent, or even 33 percent if it’s an energy-efficient home.
Other Debt Payments
Lenders also look at how much other debt you have when deciding how much you can afford to spend on your monthly mortgage payment. Other debt payments could include car loans, student loans, personal loans, or even child support or alimony payments. Typically, debt payments are only included if they’re going to last for 10 or more months going forward. For example, if you only have six months left on your student loans, those monthly payments won’t count toward your limit.
Generally, your total debt payments can’t exceed 36 percent of your income. Higher limits are available for FHA mortgages, which boost the total debt payment limit to 43 percent of your income, or 45 percent if it’s an energy-efficient home. For example, if you’re taking out a conventional mortgage and you have a $4,000 salary but $400 in student loan, your mortgage payment would be limited to $1,040 each month.
Don’t Forget Other Home Expenses
When figuring out how much you can spend on a mortgage, don’t forget the other costs that come with owning a home. For example, your lender will require you to maintain homeowner’s insurance, property taxes, and, if you’re putting down less than a 20 percent down payment, you’ll also likely have to pay for private mortgage insurance. Plus, if the house needs any repairs or appliances need to be replaced, you have to pay for that, too.
- Consumer Finance Protection Bureau: How Can I Figure Out if I Can Afford to Buy a Home and Take Out a Mortgage?
- Consumer Finance Protection Bureau: How to Decide How Much to Spend on Your Down Payment
- Motley Fool: The 28/36 Rule: How It Affects Your Mortgage Approval
- Forbes: How Much Of My Monthly Income Should I Spend On A Mortgage?
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."