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How do I determine how much mortgage I can afford?

11/08/09

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How much you afford depends on how much you can borrow and how much down payment can you make. These two are inter-related which affects the mortgage equation. Many people are in a hurry to sign up for a mortgage without considering the years of financial obligation they are taking on and what impact it will have on their financial condition later on. Mortgage lenders use a mortgage formula to see your monthly mortgage payment come in at less than 28% of your gross income and your total monthly debt payments, including your mortgage, will be less than 36% of your gross income.

A mortgage calculator will help you with a number of statements for you to rate, to help focus on what you want and then suggests approaches for you to assess. Mortgage calculator will tell you how much you can borrow, but they wouldn’t tell you the best way to get the home you want and there are other approaches that may be better for you.

First thing you need to do is to determine your gross monthly income, which is the income you have before you pay taxes and other expenses. If you are married, you can apply for the loan jointly by adding both the income of husband and wife. Next step is to determine your total non-mortgage debt payments such as monthly credit card or car loan repayment etc. Using mortgage calculator you can calculate how much loan you can afford to take considering your repayment capacity.

Remember one thing. Just because the bank is ready to give you loan doesn’t mean that you can really afford to take the loan amount. In reality your specific situation will dictate what type of home and mortgage payment will be best for you.

The last thing a borrower should consider is how comfortable they are with assuming a large amount of debt and the monthly payment obligations. Before you apply for a loan, you should make some level of estimate of how much you spend on a monthly basis to maintain the life-style that you wish to live. Evaluate this against the monthly housing and debt obligations as well as your take home income. If there is not enough money left to meet the debt obligations and still you wish to have the life style you want, then you may reconsider taking a loan.