How Much Mortgage Can I Afford?
To establish how much mortgage you can realistically afford, you can use one of two main formulas – called “Qualifying Ratios”. Qualifying ratios examine a person’s income and expenses in order to estimate how much money can reasonably be spent on monthly mortgage payments.
Buying the Home: Down Payment and Closing Costs
This is the first and most obvious factor most people consider in buying a home. How much of a down payment can I afford? And how much can I spend on closing costs?
The down payment is usually between 3% and 20% with most conventional loans preferring down payments within the 10-20% range. Low-to-moderate income households, however, can find programs enabling them to purchase homes with as little as 3-5% down.
Closing costs are fees for various items that must be handled through your lawyer in order for the deal to legally go through. These include: origination fees, title insurance, attorney fees, recording and transfer fees, and pre-pays.
Keeping the Home: Monthly Housing Expenses
Taken into account when determining monthly housing expenses are:
* Mortgage principal;
* Mortgage interest;
* Taxes;
* and Insurance.
This is commonly written as “PITI” for “Principal, Interest, Taxes, Insurance”.
In the case of conventional loans, your monthly housing expenses should fall below 26-28% of your gross monthly income. For FHA mortgages, the qualifying ratio is 29%. If you carry any long term debt (that‘s expenses extending 11 months into the future or more), then the ratios change slightly. Conventional loans allow a maximum monthly housing expenses and long-term debt combined of 33-36% of gross monthly income; FHA loans allow a 41