What Size House Payments Can You Afford?

Mortgage standards say you will typically spend about a third of your income on financing your home. Before you start to look for your dream home, you should figure out just how much afford.

Mortgage lenders look at your ability to repay the mortgage loan by reviewing:

  • Your monthly gross income
  • How much cash you can accumulate for a down payment, which is usually 10 percent to 20 percent of the sale price.

They look at your willingness to repay by looking at your credit history.

General Guidelines
You can see how much house you can afford by following a few general guidelines:

  • Your monthly mortgage payment -- including principal, interest, real estate taxes and homeowners insurance -- should not be more than 28 percent of your gross monthly income (before taxes). This is your housing expense ratio.
  • Your total monthly debt obligation should not be more than 36 percent of your gross income. Total debt includes the mortgage payment plus other obligations such as car loans, credit card bills, child support and alimony, student loans This is your debt-to-income ratio.
  • Government loans and certain other lenders may be more use a different method of computing, but these % are usually close on those types of loans also.  Some loan programs may be more lenient, but many also carry slightly higher costs and/or MI.

Examples
A homebuyer who makes $45,000 a year. The maximum amount of money available for a monthly mortgage payment at 28 percent of gross income would be $1,050.  

Then the lender looks at total payments each month should not exceed 36 percent, which comes to $1,350.

This means that your combined debt should be less than 36%.  If it is not, you can take the total debt that you have and subtract it from the 36% of income calculation.  What is left is available for house payment, real estate taxes and homeowners insurance.

In short, the less consumer debt you carry, the more house payment you can qualify for.  Some lender will allow ratios in excess of 28% of housing if your total debt ratio is lower than 32%.

Typically acceptable debt ratios are shown in the table below.

Annual Income Housing Debt*
28% of monthly
Total Debt Including Housing
36% of monthly
Gross income
(before tax deductions)
Gross x .28 divided by 12 months Gross x .36 divided by 12 months
$20,000 $467 $600
$25,000 $583 $750
$30,000 $700 $900
$40,000 $933 $1,200
$50,000 $1,167 $1,500
$60,000 $1,400 $1,800
$80,000 $1,867 $2,400
$100,000 $2,333 $3,000
$150,000 $3,500 $4,500
$200,000 $4,665 $6,000

The amount shown is the amount to cover monthly payments plus taxes, insurance and association fees and PMI if applicable.

Taxes and Insurance
There are other factors to weigh when deciding how much home you can afford:

  • Homeowner's insurance -- You must insure your property in order to obtain a mortgage. You can get an estimate of insurance costs from your insurance agent or a major insurance company in the area where you are planning to purchase.
    Some loan have special requirements for hazard insurance, such as mandatory coverage earthquakes, for floods, or windstorms. If your down payment is less than 20 percent of your home's value, you may also  have to pay private mortgage insurance (PMI).   Hint:  There are now down payment assistance programs that are not based on income.  If you are close to 20% down you may be able to get a Down Payment Assistance Grant to help you.  These grants are also available for those needing down payment assistance to qualify. 
  • Real estate taxes -- Most companies escrow taxes as part of your monthly mortgage payment.  It is important to get an estimate of the property taxes in your area. You can call the tax office in the county where you are house hunting and ask what is the local tax rate.  Most Cities also levy property tax also.
     
  • Home Owner Association Fees -- These fees can be for a variety of common costs in a neighborhood, condominium or PUD.  Ask you seller if these fees apply to the home the home you are considering.