4 Tips To Determine How Much Mortgage You Can Afford

By knowing how much mortgage you can handle, you can ensure that home ownership will fit in your budget.

Homeownership should make you feel safe and secure, and that includes financially. Be sure you can afford your home by calculating how much of a mortgage you can safely fit into your budget.

Instead of just taking out the biggest mortgage a lender qualifies you to borrow, consider how much you want to pay each month for housing based on your financial and personal goals.

Think ahead to major life events and consider how those might influence your budget. Do you want to return to school for an advanced degree? Will a new child add day care to your monthly expenses? Does a relative plan to eventually live with you and contribute to the mortgage?

Still not sure how much you can afford? You can use the same formulas that most lenders use, or try another of these traditional methods for estimating the amount of mortgage you can afford.

1. The general rule of mortgage affordability

As a rule of thumb, you can typically afford a home priced two to three times your gross income. If you earn $100,000, you can typically afford a home between $200,000 and $300,000.


To understand how that rule applies to your particular financial situation, prepare a family budget and list all the costs of homeownership, like property taxes, insurance, maintenance, utilities, and community association fees, if applicable, as well as costs specific to your family, such as day care costs.

2. Factor in your downpayment

How much money do you have for a downpayment? The higher your downpayment, the lower your monthly payments will be. If you put down at least 20% of the home's cost, you may not have to get private mortgage insurance, which costs hundreds each month. That leaves more money for your mortgage payment.

The lower your downpayment, the higher the loan amount you'll need to qualify for and the higher your monthly mortgage payment.

3. Consider your overall debt

Lenders generally follow the 28/41 rule. Your monthly mortgage payments covering your home loan principal, interest, taxes, and insurance shouldn't total more than 28% of your gross annual income. Your overall monthly payments for your mortgage plus all your other bills, like car loans, utilities, and credit cards, shouldn't exceed 41% of your gross annual income.


Here's how that works. If your gross annual income is $100,000, multiply by 28% and then divide by 12 months to arrive at a monthly mortgage payment of $2,333 or less. Next, check the total of all your monthly bills including your potential mortgage and make sure they don't top 41%, or $3,416 in our example.

4. Use your rent as a mortgage guide

The tax benefits of homeownership generally allow you to afford a mortgage payment-including taxes and insurance-of about one-third more than your current rent payment without changing your lifestyle. So you can multiply your current rent by 1.33 to arrive at a rough estimate of a mortgage payment.


Here's an example. If you currently pay $1,500 per month in rent, you should be able to comfortably afford a $2,000 monthly mortgage payment after factoring in the tax benefits of homeownership.


However, if you're struggling to keep up with your rent, consider what amount would be comfortable and use that for the calcuation instead.


Also consider whether or not you'll itemize your deductions. If you take the standard deduction, you can't also deduct mortgage interest payments. Talking to a tax adviser, or using a tax software program to do a "what if" tax return, can help you see your tax situation more clearly.

Chip Plumley can be reached at (610) 444-9090 or (610) 357-8635. Prudential Fox & Roach is an independently owned and operated member of Prudential Real Estate Affiliates, Inc., a Prudential Financial company. Equal Housing Opportunity.

ChipPlumley.com

Make One Final Inspection!

In the sales contract, the sellers of your new home agreed to leave the custom blinds, refrigerator, built-in entertainment system and those fine cabinets and workbench in the garage. But when you show up on moving day, all of those amenities are long gone. Moreover, the lock on the back door is broken; there is a huge gouge in the drywall near the front bathroom.

Although these circumstances are extreme, they could happen, which is why it is important to have a final inspection of the home you are purchasing before the closing. A pre-closing inspection gives you, one last opportunity to verify that you are getting all that was promised in the sales contract. Although buyers still have legal recourse if they discover—even after closing—that the condition of the home is not as it should be. Of course, the best time to identify problems is before closing when the seller will be motivated to correct any deficiencies to close the transaction.

Typically, a buyer takes possession of a property one to three months after signing the sales agreement. And a lot can happen before the actual move-in. Appliances and fixtures can break, and walls, carpets and doors can be damaged during the seller’s final weeks in the house, particularly during move-out. Sometimes the seller will simply have forgotten that he or she has agreed to leave the refrigerator or window coverings with the house. Whatever the reason, problems identified before the closing have the best chance of being remedied.

If possible, schedule the inspection right before the closing, such as the day before. Ask your real estate professional to attend the inspection with you. Here’s what to do:

Using a copy of the sales contract as a checklist, first make sure that all items that should be in place (appliances, built-in furniture, window coverings, fixtures, etc.) are there.

Test each appliance to make sure they work properly. Bring along an electrical clock or radio to test each electrical outlet. Test all electrical switches and the garage door opener. Run the garbage disposal and turn on every water faucet, checking under the sinks for leaks. Flush the toilets. Inspect the floors, carpets, walls and doors for recent damage.

If you discover that something is damaged or missing, make a note of it and inform your real estate professional immediately. In most cases, the seller is usually able to take care of small problems immediately, either by making a needed repair or offering compensation to handle it. And, if there are major problems, the seller can even sign a statement acknowledging the deficiency and agree to correct it. Although pre-closing inspections take time and may be inconvenient, they are important and well worth the buyer’s time.

Chip Plumley can be reached at (610) 444-9090 or (610) 357-8635. Prudential Fox & Roach is an independently owned and operated member of Prudential Real Estate Affiliates, Inc., a Prudential Financial company. Equal Housing Opportunity.

ChipPlumley.com