How Much Can I Afford to Pay for a House

In today's economy, the most important question to ask before you begin house shopping is, "How much can I afford to pay for a house, really?" What you qualify for, and the amount you can afford to spend, are not necessarily the same thing. There are numerous expenses related to purchasing and maintaining a home that few people consider when taking out a mortgage loan. Just because a mortgage lender is willing to offer you a 300,000-dollar mortgage loan, it does not mean you truly have the ability to repay that amount.

Mortgage lenders consider several factors when determining your ability to repay your loan. Your credit history, monthly gross income, and down payment amount are three primary areas reviewed by a mortgage lender. Many lenders will also consider the amount of recurring debt you owe, such as credit card balances, student loans, child support, alimony, and car loans.

While specific figures vary by lender, most insist that your monthly gross income be equal to, or greater than, three or four times the amount of your mortgage payment. Therefore, if your gross monthly income is 4,500 dollars, you may qualify for a mortgage payment of approximately 1,100 to 1,500 dollars. Unfortunately, this formula is not suitable for all homebuyers, which can lead to significant debt and potential foreclosure.

To determine truly how much you can afford to spend on a home, you must consider your current lifestyle, your plans for the future, and all outgoing monthly expenses you have.

A high monthly mortgage payment may suit you if you desire a large, nice home, but live frugally in other areas. In turn, owning an expensive home, and taking on the obligation of decades of large monthly payments, may not fit into some people's current or desired lifestyle.

It is essential to consider the impact of a high monthly mortgage on your retirement plans and future goals. If you have a considerable savings, or expect to continue receiving a decent income after retirement, a larger mortgage may work for you. However, if you have just started saving for retirement, have children to put through college, or wish to travel later in life, an expensive monthly mortgage payment may prevent you from accomplishing those goals.

Do not base your mortgage payment solely on your income. You must consider every outgoing expense you have, including those directly and indirectly related to the purchase of your new home. A mortgage calculator may help you with this process.

1. Home-Buying Expenses: Calculate direct expenses, such as community association fees, moving expenses, truck rental fees, insurance costs, property taxes, and expenses related to furnishing your new home, and consider those costs in addition to your expected monthly mortgage payment. Some of these bills are recurring, and can quickly drain your wallet if you do not factor them in ahead of time.
2. Regular Monthly Expenses: Indirect expenses, such as car payments, school tuition, electricity costs, gym memberships, medical insurance, and holiday money add up quickly. Make a list of all monthly expenses you currently have and expect to have, including the cost of utilities, food, and other monthly outgoings, and then add 50 percent to that total. This will provide you with some idea of what you can really afford to spend on a home. You must be certain you have more than enough income, or you will find yourself in debt when your roof needs replacing or if you need new tires for your car.
3. Determining Your Budget: Subtract the total of your indirect and direct expenses from your current income and savings total. If the remaining sum is enough for you to live on comfortably, you can probably afford to purchase a new home. If not, you need to adjust your current lifestyle, pay of all debt possible, or look for a smaller mortgage amount.

Whenever possible, pay off your current debts before you begin looking for a new home, and put down at least 20 percent when financing. Larger down payments will reduce your monthly payments and possibly lower your interest rate.

Ask yourself, “How much can I afford to pay for a house?” If you cannot answer this question, you are not ready to purchase a new home. Speak with a financial advisor, take a thorough look at your income and expenses, consider your lifestyle and future goals, and then determine a budget.

Once you set a maximum amount, do not stray from that figure – even if a mortgage lender offers you a larger loan amount than you expect. While it is easy to get caught up in the excitement of buying a new home, agreeing to an expensive mortgage puts you at risk for defaulting on your loan, which can lead to foreclosure, bankruptcy, and ruined credit.

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