How Much House Can I Afford?

If you are buying a home, you may wonder how much house can I afford? The answer depends on a lot of things, but in large part comes down to how much of your monthly income you want to spend on mortgage payments.

When most people ask how much house can I afford, they are referring to how much of a mortgage can they afford to take on. After all, few people have $100,000 or $200,000 or more sitting around to go and pay cash for a house. Instead, they take out a mortgage and pay monthly payments for a period that usually spans about 15 to 30 years and at the end of the period of time, they own the home.

Therefore, will there is some discussion on how much total house you can buy- such as experts who recommend your total mortgage be no more than twice your annual income or no more than 2 1/2 times your annual income, much of the discussion of affordability centers on how much you can afford to pay in mortgage payments monthly.

By deciding how much you can afford to pay each month for your mortgage, you can then work backward to determine how much of a total mortgage you can afford to take out.

Your Monthly Mortgage Payments

Your monthly mortgage payments normally consist of four different things, which in the banking industry are often referred to as PITI. PITI stands for:

• Principle
• Interest
• Property taxes
• Insurance

This means that your mortgage payment calculation normally refers to the amount you have to pay in principle each month, the amount of interest you have to pay each month, the amount of property taxes you have to pay (these are assessed annually but the banks normally divide that number up and look at a monthly figure) and the amount of the premium for your home owners insurance.

Therefore, your monthly mortgage payment can vary dramatically depending on all these factors. Buying a $100,000 house, for example, may leave you with a very different mortgage payment if you take that mortgage at 6 percent interest and have $10,000 a year in property taxes than if you take that mortgage at 4 percent interest and have $2000 a year in property taxes.

When you consider what your monthly mortgage payments will be on a house, it is therefore essential to consider all these factors in determining how much house can I afford?

Determining Affordability

One of the best ways to determine affordability is to look at your debt to income ratio. This is the amount of your monthly income that will be used to pay your debts. For example, to get an FHA loan (a loan backed by the Federal Housing Authority), the ratio used is 29:41. This means that your mortgage debt cannot exceed 29 percent of your gross monthly income and your total debt cannot exceed 41 percent of your gross monthly income.

For example, for simplicities sake, assume you brought home $1000 per month. You could have a mortgage payment- including PITI-  of no greater than $290.00 (29 percent of $1000) per month. Your total debts, including your mortgage, car loan, credit card payments, student loan payments and all other debts could be no greater than $410 (41 percent of $1000.) Thus, the more you make, the larger amount of mortgage debt you can take on and the more home you can afford to buy.