How Big a Loan Can I Afford for a House?
- When figuring out how much of a home loan you can afford, the first step is identifying your total gross income. Add up all income sources, including wages from a job, self-employment, alimony and other amounts you take in throughout the year. Divide that total by the 12 months in the year to determine the gross monthly income. You'll need this amount to determine exactly how much of a loan you can afford.
- Mortgage brokers and lenders pass loan applications when they meet industry-accepted debt-to-income requirements. The general requirement is that the borrower's house-related debt-to-income ratio is 28 percent or less. That means the estimated monthly house payment (including taxes and insurance) cannot exceed 28 percent of the total gross monthly income. So for instance, if you earn $2,000 per month, you can afford a total payment of $560 per month or less. Potential lenders also need to ensure that the borrower's total debt-to-income ratio (including credit cards and other loans) is 36 percent or less.
- One of the quickest ways of figuring out how big a loan you can afford is to use Bankrate.com's "How Much House Can You Afford?" calculator. Enter details about your income, the proposed loan and your monthly expenses in one place to get a full report on what you can afford for a home loan. Take this information with you when shopping for houses.
- Besides using the requirements set by lenders, examine your budget before deciding how much of a loan you can afford to buy a house. List all of your expenses (except housing) along with your take home income to determine how much money you have left over each month to pay towards housing. Remember to include the cost of property taxes, insurance and putting money away each month to cover home repairs. Unlike a rental, when you own a home you're responsible for maintaining the property.
