When it comes to getting approved for a mortgage or home loan, the number one question that potential buyers tend to have is how much mortgage can I afford?
This is not only a very common question, but one that can be more difficult to answer than it seems. While there is a basic formula that most experts agree upon to at least give you a starting point in determining your mortgage potential—everyone is different and every market is different. There are many areas of the country where people simply have to spend more of their income on housing than they should, because that is what the market dictates.
There are also certain expenses that may not be factored into this calculation. These could be expenses that are more important than housing, given your situation and ones that may impact how much income you have to allocate towards your mortgage.
However, for the average home buyers this traditional formula is one of the best was to determine how much mortgage they can afford given their current income.
Your Home Price = 2.5 x Your Annual Salary
So, if you make $100,000 a year, your desirable home price should be around $250,000.
That can seem low to some people, but it is typically a safe way to make certain you aren’t in over your head and at risk of becoming house poor. Unfortunately, $250,000 isn’t a realistic amount for many home buyers, as a lot of cities simply don’t have housing available in that price range.
Most experts say that you can afford a mortgage payment that is as high as 28% of your gross income. If you are bringing in $100,000 per year, that means a monthly payment of around $2,300 per month or a $450,000 loan.
Those are some pretty different numbers, which is why this is such a difficult question to answer. Most households find it easiest to determine how much mortgage they can afford by looking first at the monthly payment and how much money they can factor into their current monthly expenses. Of course, other factors to consider include moving expenses, closing costs, insurance, taxes and mortgage insurance which is required if you are putting less than 20% down on your home.
This all of course comes in addition to the down payment you will need to make and can be influenced by the insurance rate you are able to get, which is highly dependent on your credit score.
Seem like a lot of factors to consider? It is. Which is why the best thing you can do is take the time to sit down with a loan expert discuss your options and see how much how you qualify for. Once you know how much you can take out and how much those monthly payments will be, you need to see if it works for you personally given you existing expenses and monthly budget.