How Much House Can You Afford?

If you are thinking about buying a house, either for the first time or upgrading, it is a good idea to calculate how much of a mortgage payment can you afford. It’s best to calculate these numbers BEFORE you start looking for a house. Otherwise, you run the risk of clouding your judgment or wasting your time looking at houses you can’t afford. So, how do we calculate how much we can afford? It’s not a hard calculation but it does require you to be honest with yourself.

STEP 1 - Figure Out Your Net Income

This is your income minus:

• taxes
• Social Security withholding
• retirement contributions
• and anything else that is taken directly out of your check

For this example, we’ll assume that your monthly NET income is $4,500.

STEP 2 - Add Up Your Monthly Payments on ALL Your Debt

These items can include the following:

• student loans
• car payments
• credit card payments

NOTE: do not include your rent or current mortgage payment.

If this number is MORE THAN 30% of your net income (or $1,350 using the $4,500 from above), STOP! You have too much debt! Your first priority should be to pay down your current debts so that you can better afford a mortgage payment in the future.

STEP 3 - Add Up ALL Your Monthly Living Expenses

Be sure to include EVERYTHING (even items that are marked savings). Be honest with yourself. If it’s something you pay once a year, divide it by 12 to get the monthly amount.

NOTE: Again, do not include your rent or current mortgage payment.

Subtract your monthly expenses from your net income (found in STEP 1). What’s left over is the MAXIMUM amount that you can afford to spend on your mortgage payment (including property taxes, homeowner’s insurance, maintenance, PMI, and any other costs that come with home ownership.)

Keep in mind that this formula does not include any tax benefits that might be available to you via income tax deductions. It would be beneficial for you to sit down with your tax consultant or your tax software and run the numbers to see what type of deductions you might be able to get. Any deductions will lower your monthly costs of home ownership.

What if you’re not ready for a mortgage payment? Don’t sweat it. Pay down your debts, save up some money, and have patience.

For further assistance in figuring your maximum mortgage payment and finding the perfect home...call me anytime day or night!
Andi Thapa
Your Hoover Real Estate Specialist
(205) 602-4588