How To Buy A Home - How Much Can I Afford?


As you may (or may not) know, you need both a down payment as well as the ability to make monthly mortgage payments!

You therefore might be tempted to ask, "How much will I need in order to make the monthly payments?" But actually we'll approach this question from the other direction: We'll find out the most expensive house you can buy given your income and savings. This is called how much home you can afford. You won't necessarily buy the most expensive home you can afford, but you still want to know what your upper limit is. You don't want to waste your time looking at homes you can't afford, and you also don't want to pass up homes you thought you couldn't afford but which might actually be within your reach.

Here's the super-quick rule of thumb:

Most people can afford a home that costs up to three times their annual household income, if they can make a 20% down payment and have only a moderate amount of other debt. If you have little to no debt and can put 20% down you can probably buy a house worth up to four times your annual income.

Examples:

If you make $57,200 a year (which was the median household income for first-time homebuyers in 2006) and have money for a down payment saved, you can probably buy a $171,600 home if you have moderate debt (debt payments of <12% of your income), and a $229,000 home if you have little or no debt. But of course, this is just a quick rule of thumb and you'll want to get a more accurate figure. The rest of this page will help you with that. Also, if you're income is small but you're sure you can make the mortgage payments and you have excellent credits there may be other options for you, which we'll get to later.

The first concept for figuring how much home you can afford is pretty simple.

Since you pay for your house with a combination of a down payment and a bank loan, the total of both is the cost of the home:

Down Payment + Biggest Loan You Qualify For = How Much Home You Can Afford

The down payment part of the equation is easy to figure -- this is the total of your savings that you're willing to put into your house. (We'll cover down payments in more detail on the next page.) We assume you have money for a down payment because if you don't then you probably can't afford any home, since it's hard to get a loan with 0% down. You usually need a bare minimum of 3% of the purchase price down, more typically 10% or more.

The amount you can get from a lender is a little trickier since it's based on many factors. Here's a calculator that will help you with that.


Below is an application that contains 19 different mortgage calculators, they are at your disposal to calculate any form of home loan possible!

19 Mortgage Calculators Get this Widget

Current National Rates

Mortgage Rates © ML

 


Here are some helpful tips to remember.

  • Putting 20% or more down opens lots of doors. When you can make a down payment this big you're almost certain to qualify for some kind of loan. The bank will be willing to loan more money than otherwise, and you won't have to pay for private mortgage insurance (PMI), which in turn helps you afford even more home.
  • Debt holds you back. The more debt you already have the less home you can buy. Decreasing your debt allows you to afford a more expensive home, everything else being equal.
  • Buying a duplex or a house with a garage apartment increases your buying power. When you get a home with a unit you can rent out, you can count the rent you'll receive as income. This can allow you to buy a substantially more expensive home than otherwise -- which will be a much better investment. Your net monthly payments could actually wind up being cheaper, too, once you subtract the rent you'll receive.
  • 30-year loans vs. 15-year loans The advantages of a 30-year loan are that the monthly payments are lower, and with a 30-year mortgage you can qualify for a much larger loan and buy a much larger (or nicer) house. The downside is that you have to make payments for an extra 15 years vs. a 15-year loan, and you'll pay a lot more total interest over the life of the loan.Still, in most cases you'll go with a 30-year loan.
  • We've left out one important thing--closing costs You'll need to either pay the closing costs from your savings (lowering the amount you have available for a down payment), or qualify for a loan that's a little larger than the house you want to buy, and have the closing costs added to the loan (which is called "rolling the closing costs" into the mortgage).

How much do homes cost?

Now that you have an idea of how much home you can afford, how do you find out whether that's enough? That is, are there homes to be had for the amount you can afford? Here are two quick pieces of advice.

First, don't get sticker shock by looking at the pictures ads of homes for sale in the newspaper, or in those real estate magazines, because it's the more expensive homes that get advertised. Cheaper houses definitely exist, it's just not cost-effective for realtors to buy big ads for cheap houses.

Second, you can get an idea of the cost of homes in a given neighborhood at Zillow.com.

Ignore the national median figure of $225,000 in 2006. Homes could be way less or way more than that depending on where you live and the size & condition of the home you want to buy.

Figuring your monthly payment.

Figuring the max you can afford is all fine and good, but once you have a specific home in mind you'll want to know what your payments will be on that home. Here's a quick table to give you a rough idea. A general rule of thumb is that your monthly payment will be between 0.75% to 1.15% of the purchase price.

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Estimated Monthly Payment based on Home Price

for 5/10/20% down on a 30-year loan � includes est. taxes & insurance

 

$100,000
$150,000
$200,000
$250,000
$275,000
$300,000

6.00%

800 / 745 / 646
1199 / 1118 / 969
1600 / 1490 / 1292
1999 / 1863 / 1616
2199 / 2050 / 1777
2400 / 2236 / 1938

6.33%

820 / 765 / 663
1230 / 1147 / 995
1640 / 1530 / 1326
2050 / 1912 / 1659
2255 / 2103 / 1824
2460 / 2294 / 1990

6.67%

841 / 785 / 681
1262 / 1177 / 1022
1682 / 1570 / 1362
2103 / 1962 / 1703
2313 / 2158 / 1874
2524 / 2354 / 2044

7.00%

862 / 805 / 699
1293 / 1207 / 1048
1724 / 1610 / 1398
2155 / 2011 / 1747
2371 / 2213 / 1922
2586 / 2414 / 2096

7.33%

883 / 825 / 717
1325 / 1237 / 1075
1766 / 1650 / 1434
2208 / 2062 / 1792
2429 / 2268 / 1971
2650 / 2474 / 2150

7.67%

905 / 845 / 735
1358 / 1268 / 1103
1810 / 1690 / 1470
2263 / 2114 / 1838
2490 / 2325 / 2022
2716 / 2536 / 2206