How Much House Can I Afford?

If you are thinking of buying a home, you might be thinking “How much house can I afford?”  That question has two answers.  The first will be the amount of loan for which you qualify.  The second is how much can you comfortably spend and still afford to enjoy life.  Often times you can qualify for far more then you think so it will be up to you to ensure that you don’t overspend.

Qualifying for a mortgage

There are many different types of loans available.  Some of the more common loan types are FHA, VA and Conventional.  Each has different requirements but all will look at the following:

  • Length of employment - ideally you’ll want to be working in the same line of work for at least 2 years.
  • Credit score – your credit score is an indicator of how likely you are to repay your loan.  While credit scores range from 350 to 800, most lenders will not lend below a score of 640.  But there are (depending upon the market) often exceptions.
  • Down payment amount – while VA loans offer zero down payment, FHA loans require a minimum of 3.5% down and conventional loans require a minimum of 5% down.  The amount of money you can put down on the house will have an impact on your loan qualification.
  • Debt Load – the amount of monthly debt you carry compared to your income is probably the greatest factor in that if everything else is good, your debt load will determine the amount for which you qualify.

Determining how much house you can buy

To determine how much house you can buy we’ll use the qualification process for an FHA loan because it is the most stringent.  The FHA dictates that your monthly debt cannot be greater than 36% of your gross monthly income and your mortgage cannot be greater than 28%. 

To determine how much you will qualify for, a mortgage lender will multiply your gross monthly income by 36% (.36) and then subtract your monthly debts.  The amount left over, up to 28% of your gross monthly income, will be the amount you can spend on a monthly mortgage.

Calculating Your Gross Monthly Income

To do this math yourself first calculate your gross monthly income which should include all income before taxes, including base salary, commissions, bonuses, overtime, tips (regularly received), rental income, investment income, alimony, child support, disability, etc.

So for example, let’s say you earn $3500 per month and receive $500 per month in child support.  Your total monthly gross income is $4000.  We multiply that by .36 to determine the maximum monthly debt the FHA will allow you to carry when qualifying you for a loan.

$4000 * .36 = $1440

Calculating Your Monthly Debts

Now subtract your monthly debt.  Your monthly debt should include:

  • Car loans
  • Student loans
  • Alimony payments
  • Child support payments
  • House payments for properties you own other than the new mortgage you are seeking
  • Rental property maintenance
  • Any other personal loans; and
  • All credit card payments that you don’t pay off monthly.  When calculating credit card payments you’ll use the minimum monthly payment required to be paid even if you pay more than the minimum each month.

In our example, each month you make a $300 car payment, a $200 student loan payment, and you have a Sears credit card with a total amount due of $500.  You are trying to pay it off quickly so you are sending Sears $100 per month but the minimum payment is only $10. 

Your total monthly expenses are $300 + $200 + $10 = $510.

Calculating the amount of house you can buy

We then subtract your total monthly expenses of $510 from the 36% of your gross monthly income.

$1440 - $510 = $930

$930 represents the total amount of money your mortgage payment can be. 

Now a mortgage payment is made up of four parts:  Principle, Interest, Taxes and Insurance.

If you know the average taxes and insurance in the area you’ll subtract that from the mortgage payment.  In the Canon City area, we estimate for a $150,000 house that taxes and insurance will be about $150 per month. 

So subtract that from the $930 per month and get $780.  This is the total amount of money you can spend per month on the principle and interest portion of your housing payment. 

To determine the price of homes that you can purchase based on what you qualify for, use the table here. 

First, look in the column that displays the current market interest rate.  Find the line that has the dollar amount not exceeding the amount you calculated above.  Look to the left column to see the purchase price you can spend. 

In our example, we calculated $780.  Today’s interest rates are 4.5%.  Looking in the 4.50% column we see that $780 comes in between the $760 and $810 so you would likely qualify to buy a house priced at about $155,000.

Mortgage Table - Principle & Interest
  4% 4.50% 5% 5.50% 6% 6.50% 7% 7.50% 8%
50000 $238.71 $253.34 $268.41 $283.89 $299.78 $316.03 $332.65 $349.61 $366.88
60000 $286.45 $304.01 $322.09 $340.67 $359.73 $379.24 $399.18 $419.53 $440.26
70000 $334.19 $354.68 $375.78 $397.45 $419.69 $442.45 $465.71 $489.45 $513.64
80000 $381.93 $405.35 $429.46 $454.23 $479.64 $505.65 $532.24 $559.37 $587.01
90000 $429.67 $456.02 $483.14 $511.01 $539.60 $568.86 $598.77 $629.29 $660.39
100000 $477.42 $506.69 $536.82 $567.79 $599.55 $632.07 $665.30 $699.21 $733.76
110000 $525.16 $557.35 $590.50 $624.57 $659.51 $695.27 $731.83 $769.14 $807.14
120000 $572.90 $608.02 $644.19 $681.35 $719.46 $758.48 $798.36 $839.06 $880.52
130000 $620.64 $658.69 $697.87 $738.13 $779.42 $821.69 $864.89 $908.98 $953.89
140000 $668.38 $709.36 $751.55 $794.90 $839.37 $884.90 $931.42 $978.90 $1,027.27
150000 $716.12 $760.03 $805.23 $851.68 $899.33 $948.10 $997.95 $1,048.82 $1,100.65
160000 $763.86 $810.70 $858.91 $908.46 $959.28 $1,011.31 $1,064.48 $1,118.74 $1,174.02
170000 $811.61 $861.37 $912.60 $965.24 $1,019.24 $1,074.52 $1,131.01 $1,188.66 $1,247.40
180000 $859.35 $912.03 $966.28 $1,022.02 $1,079.19 $1,137.72 $1,197.54 $1,258.59 $1,320.78
190000 $907.09 $962.70 $1,019.96 $1,078.80 $1,139.15 $1,200.93 $1,264.07 $1,328.51 $1,394.15
200000 $954.83 $1,013.37 $1,073.64 $1,135.58 $1,199.10 $1,264.14 $1,330.60 $1,398.43 $1,467.53
210000 $1,002.57 $1,064.04 $1,127.33 $1,192.36 $1,259.06 $1,327.34 $1,397.14 $1,468.35 $1,540.91
220000 $1,050.31 $1,114.71 $1,181.01 $1,249.14 $1,319.01 $1,390.55 $1,463.67 $1,538.27 $1,614.28
230000 $1,098.06 $1,165.38 $1,234.69 $1,305.91 $1,378.97 $1,453.76 $1,530.20 $1,608.19 $1,687.66
240000 $1,145.80 $1,216.04 $1,288.37 $1,362.69 $1,438.92 $1,516.96 $1,596.73 $1,678.11 $1,761.03
250000 $1,193.54 $1,266.71 $1,342.05 $1,419.47 $1,498.88 $1,580.17 $1,663.26 $1,748.04 $1,834.41

 

The best way to determine if you qualify to buy a home

The best way to determine if you qualify to buy a home is to take 15 minutes and talk to a mortgage lender. As a Realtor for 38 years, my team and I work with various lenders to help buyers determine how much they can realistically afford when buying a home. We know the best lenders in Fremont County and Canon City.  We’ll help find the right lender for your financial situation. 

Call me today to start the home buying process and to get pre-qualified.