4 Tips to Determine How Much Mortgage You Can Afford

By: G. M. Filisko

Published: March 11, 2010

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

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.

More from HouseLogic

More on the mortgage interest deduction

More on the tax advantages of homeownership

Other web resources

A worksheet on home affordability

Freddie Mac information on home affordability

G.M. Filisko is an attorney and award-winning writer who’s owned her own home for more than 20 years. A frequent contributor to many national publications including Bankrate.com, REALTOR® Magazine, and the American Bar Association Journal, she specializes in real estate, business, personal finance, and legal topics.

Survey: Consumers Comparison Shop for Everything Except Their Mortgage

RISMEDIA, December 15, 2010—Consumers today are expert comparison shoppers, always on the hunt for the best deal, but when it comes to their mortgage, borrowers often lock in their first home loan offer.

According to a new LendingTree survey of 1,317 homeowners conducted online by Harris Interactive in September, 96 percent of American consumers compare prices when shopping for anything, but nearly 40 percent obtain just one home loan quote. By comparison, when shopping for a home computer, consumers research an average of 3.1 models before making a purchase. This explains why fewer than 3 in 10 (28 percent) borrowers are very confident they received the best possible deal on their current mortgage.

Based on a nationally representative sample of current homeowners who were involved in shopping for their home loan, the study revealed 85 percent of consumers use the web to comparison shop, yet just more than 1 in 5 (21 percent) shopped online first for mortgage rates. Additionally, although nearly 40 percent obtain just one home loan quote, more than 9 in 10 borrowers (91 percent) understand interest rates vary between lenders.

Frustration also appears to be at the root of this shopping dilemma. According to the survey, 70 percent of borrowers find shopping for a mortgage frustrating, citing the complexity of the terms (21 percent) and time-intensiveness nature of the process (20 percent).

The survey also reveals:
• Though it is a decision that will affect them for the next 15-30 years, nearly three-quarters (72 percent) of homeowners spent the equivalent of a full working day or less shopping for their home loan. Even more shocking? One in 10 spent the amount of time it takes to brush their teeth.
• Twenty-three percent of homeowners recognize they could save more than $100 a month by reducing their mortgage rate by one percent.
• Women are more than twice as likely as men to say they were not at all involved with shopping for their mortgage or when refinancing (16 percent versus seven percent, respectively).