Home Buyer College
Here’s A Quick Way To Figure Out How Much House You Can Afford…
The stock answer given to this question is - if you rent and have case for a down payment, you can purchase a home. But what if you don't rent? Then, here's the simplified version of what a mortgage broker would do with you.
Step one: (Annual salary / 12)
What is your gross monthly income from all sources? If your annual salary is $75,000, divide this by 12 and you'll see that your monthly income is $6,250.
Step Two: (Monthly salary X percent you want to spend)
Brokers and financial planners will recommend that you spend anywhere between 25% and 36% of your monthly income on household expenses. We're going to use 36%. $6,250 X .36 = $2,250.
Step Three: (Calculate your debt)
Add up your currently monthly debt. This includes things like a car loan, insurance, school loans, credit cards, and any other personal debt you may have.
All of this added together gives you your total debt. Just a guess, but let's say that these ad up to $750 a month.
Step Four: (Amount you want to spend - total debt)
Now, take that total debt and subtract it from the amount that you were willing to spend per month to get your maximum monthly payment.
$2,250 - $750 = $1,500
Step 7: (Mortgage + Down payment)
Now, take the amount that you have calculated that you can afford to pay for a mortgage, add the amount of case that you have on hand to make a down payment, and you get your purchase price!
So, using the current example: The mortgage was $180,000 plus you have $20,000 on hand for a down payment, then you can afford to purchase a home for $200,000.
Now, did that REALLY seem like algebra to you?
Although this is a quick and easy estimate, you should work with a mortgage lender so that you known EXACTLY how much you can afford.