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.

8 Tips for Finding Your New Home

By: G. M. Filisko

Published: February 10, 2010

A solid game plan can help you narrow your homebuying search to find the best home for you.

1. Know thyself

Understand the type of home that suits your personality. Do you prefer a new or existing home? A ranch or a multistory home? If you’re leaning toward a fixer-upper, are you truly handy, or will you need to budget for contractors?

2. Research before you look

List the features you most want in a home and identify which are necessities and which are extras. Identify three to four neighborhoods you’d like to live in based on commute time, schools, recreation, crime, and price. Then hop onto REALTOR.com to get a feel for the homes available in your price range in your favorite neighborhoods. Use the results to prioritize your wants and needs so you can add in and weed out properties from the inventory you’d like to view.

3. Get your finances in order

Generally, lenders say you can afford a home priced two to three times your gross income. Create a budget so you know how much you’re comfortable spending each month on housing. Don’t wait until you’ve found a home and made an offer to investigate financing.

Gather your financial records and meet with a lender to get a prequalification letter spelling out how much you’re eligible to borrow. The lender won’t necessarily consider the extra fees you’ll pay when you purchase or your plans to begin a family or purchase a new car, so shop in a price range you’re comfortable with. Also, presenting an offer contingent on financing will make your bid less attractive to sellers.

4. Set a moving timeline

Do you have blemishes on your credit that will take time to clear up? If you already own, have you sold your current home? If not, you’ll need to factor in the time needed to sell. If you rent, when is your lease up? Do you expect interest rates to jump anytime soon? All these factors will affect your buying, closing, and moving timelines.

5. Think long term

Your future plans may dictate the type of home you’ll buy. Are you looking for a starter house with plans to move up in a few years, or do you hope to stay in the home for five to 10 years? With a starter, you may need to adjust your expectations. If you plan to nest, be sure your priority list helps you identify a home you’ll still love years from now.

6. Work with a REALTOR®

Ask people you trust for referrals to a real estate professional they trust. Interview agents to determine which have expertise in the neighborhoods and type of homes you’re interested in. Because homebuying triggers many emotions, consider whether an agent’s style meshes with your personality.

Also ask if the agent specializes in buyer representation. Unlike listing agents, whose first duty is to the seller, buyers’ reps work only for you even though they’re typically paid by the seller. Finally, check whether agents are REALTORS®, which means they’re members of the NATIONAL ASSOCIATION OF REALTORS®. NAR has been a champion of homeownership rights for more than a century.

7. Be realistic

It’s OK to be picky about the home and neighborhood you want, but don’t be close-minded, unrealistic, or blinded by minor imperfections. If you insist on living in a cul-de-sac, you may miss out on great homes on streets that are just as quiet and secluded.

On the flip side, don’t be so swayed by a “wow” feature that you forget about other issues—like noise levels—that can have a big impact on your quality of life. Use your priority list to evaluate each property, remembering there’s no such thing as the perfect home.

8. Limit the opinions you solicit

It’s natural to seek reassurance when making a big financial decision. But you know that saying about too many cooks in the kitchen. If you need a second opinion, select one or two people. But remain true to your list of wants and needs so the final decision is based on criteria you’ve identified as important.

More from HouseLogic

HOAs: What You Need to Know About Rules

A Financial Plan for Your Home

When It Pays to Do It Yourself

G.M. Filisko is an attorney and award-winning writer who has found happiness in a brownstone in a historic Chicago neighborhood. 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.

Keep Your Home Purchase on Track

By: G. M. Filisko

Published: March 30, 2010

You’ve found your dream home. Make sure missteps don’t prevent a successful closing.

1. Be truthful on your mortgage application

You may think fudging your income a little or omitting debts when applying for a mortgage will go unnoticed. Not true. Lenders have become more diligent in verifying information on mortgage applications. If you fib, expect to be found out and denied the loan you need to fund your home purchase. Plus, intentionally lying on a mortgage application is a crime.

2. Hold off on big purchases

Lenders double-check buyers’ credit right before the closing to be sure their financial condition hasn’t weakened. If you’ve opened new credit cards, significantly increased the balance on existing cards, taken out new loans, or depleted your savings, your credit score may have dropped enough to make your lender change its mind on funding your home loan.

Although it’s tempting to purchase new furniture and other items for your new home, or even a new car, wait until after the closing.

3. Keep your job

The lender may refuse to fund your loan if you quit or change jobs before you close the purchase. The time to take either step is after a home closing, not before.

4. Meet contingencies

If your contract requires you to do something before the sale, do it. If you’re required to secure financing, promptly provide all the information the lender requires. If you must deposit additional funds into escrow, don’t stall. If you have 10 days to get a home inspection, call the inspector immediately.

5. Consider deadlines immovable

Get your funds together a week or so before the closing, so you don’t have to ask for a delay. If you’ll need to bring a certified check to closing, get it from the bank the day before, not the day of, your closing. Treat deadlines as sacrosanct.

More from HouseLogic

How maintenance adds to home values

Reducing closing stress

Other web resources

More on calculating closing costs 

More on the closing process

G.M. Filisko is an attorney and award-winning writer who wanted a successful closing on a Wisconsin property so bad that she probably made her agent rethink going into real estate. 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.

7 Steps to Take Before You Buy a Home

By: G. M. Filisko

Published: February 10, 2010

By doing your homework before you buy, you’ll feel more content about your new home.

1. Decide how much home you can afford

Generally, you can afford a home priced 2 to 3 times your gross income. Remember to consider costs every homeowner must cover: property taxes, insurance, maintenance, utilities, and community association fees, if applicable, as well as costs specific to your family, such as day care if you plan to have children.

2. Develop your home wish list

Be honest about which features you must have and which you’d like to have. Handicap accessibility for an aging parent or special needs child is a must. Granite countertops and stainless steel appliances are in the bonus category. Come up with your top-five must-haves and top-five wants to help you focus your search and make a logical, rather than emotional, choice when home shopping.

3. Select where you want to live

Make a list of your top-five community priorities, such as commute time, schools, and recreational facilities. Ask your REALTOR® to help you identify three to four target neighborhoods based on your priorities.

4. Start saving

Have you saved enough money to qualify for a mortgage and cover your downpayment? Ideally, you should have 20% of the purchase price set aside for a downpayment, but some lenders allow as little as 5% down. A small downpayment preserves your savings for emergencies.

However, the lower your downpayment, the higher the loan amount you’ll need to qualify for, and if you still qualify, the higher your monthly payment. Your downpayment size can also influence your interest rate and the type of loan you can get.

Finally, if your downpayment is less than 20%, you’ll be required to purchase private mortgage insurance. Depending on the size of your loan, PMI can add hundreds to your monthly payment. Check with your state and local government for mortgage and downpayment assistance programs for first-time buyers.

5. Ask about all the costs before you sign

A downpayment is just one homebuying cost. Your REALTOR® can tell you what other costs buyers commonly pay in your area—including home inspections, attorneys’ fees, and transfer fees of 2% to 7% of the home price. Tally up the extras you’ll also want to buy after you move-in, such as window coverings and patio furniture for your new yard.

6. Get your credit in order

A credit report details your borrowing history, including any late payments and bad debts, and typically includes a credit score. Lenders lean heavily on your credit report and credit score in determining whether, how much, and at what interest rate to lend for a home. Most require a minimum credit score of 620 for a home mortgage.

You’re entitled to free copies of your credit reports annually from the major credit bureaus:Equifax, Experian, and TransUnion. Order and then pore over them to ensure the information is accurate, and try to correct any errors before you buy. If your credit score isn’t up to snuff, the easiest ways to improve it are to pay every bill on time and pay down high credit card debt.

7. Get prequalified

Meet with a lender to get a prequalification letter that says how much house you’re qualified to buy. Start gathering the paperwork your lender says it needs. Most want to see W-2 forms verifying your employment and income, copies of pay stubs, and two to four months of banking statements.

If you’re self-employed, you’ll need your current profit and loss statement, a current balance sheet, and personal and business income tax returns for the previous two years.

Consider your financing options. The longer the loan, the smaller your monthly payment. Fixed-rate mortgages offer payment certainty; an adjustable-rate mortgage offers a lower monthly payment. However, an adjustable-rate mortgage may adjust dramatically. Be sure to calculate your affordability at both the lowest and highest possible ARM rate.

More from HouseLogic

Learn how Fannie Mae and Freddie Mac mortgages can help you save on financing

Learn more about the costs of homeownership

Other web resources

Homebuyer counseling resources

Get a free credit report from each of the three credit reporting bureaus

G.M. Filisko is an attorney and award-winning writer who has thrice survived the homebuying process. 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.

Best, Worst Real Estate Markets

Daily Real Estate News  |  January 19, 2011

More than 15 states are projected to experience housing inflation or appreciation during the year, according to Housing Predictor, which releases an annual report of its choices for best and worst housing markets.

The top five housing markets are:
1. Portland, Maine
2. Kansas City, Kan.
3. Tri-Cities, Wash.
4. Omaha, Neb.
5. Fargo, N.D.

However, not all markets will fare well in 2011, with the foreclosure crisis particularly still battering some areas as well as high unemployment and overbuilding during the boom era that has led to high home inventories.

The top 5 worst markets, according to Housing Predictor, are:
1. Bend, Ore.
2. Las Vegas
3. Atlantic City, N.J.
4. Miami, Fla.
5. Medford, Ore.

View all 25 worst markets that made the list in the Housing Predictor report.: "Best and Worst Real Estate Markets Announced in 2011", PR.com (Jan. 17, 2011)

6 Most Promising Real Estate Markets for 2011

Daily Real Estate News  |  March 14, 2011

Inman News recently released a list of 10 real estate markets to watch in 2011 based on housing, economic, and demographic data. Inman News took into account such factors as the area's median sales price, unemployment rate, sales volume, and foreclosure activity.

1. Washington-Arlington-Alexandria, D.C.-Va.-Md.-W.Va.: The metro area was one of the few markets to see year-over-year gains in its home prices.

Median sales price (Q4 2010): $331,100
Median sales price % change (Q4 2009-Q4 2010: 8.1 percent
Foreclosure activity rate (2010): 1 in 49 units

2. Buffalo-Niagara Falls, N.Y.:  This metro area for the last year has boasted a low delinquency rate and one of the lowest foreclosure rates in the country. It also has one of the fastest-rising median list prices in the nation.

Median sales price (Q4 2010): $126,500
Median sales price % change (Q4 ’09-Q4 ’10): 14.3 percent
Foreclosure activity rate (2010): 1 in 322 units

3. Des Moines, Iowa:  The city has a low unemployment rate and one of the highest projected job growth rates for the third quarter of 2011.

Median sales price (Q4 2010): $151,300
Median sales price % change (Q4 ’09-Q4 ’10): 5.5 percent
Foreclosure activity rate (2010): 1 in 79 units

4. Portland-South Portland-Biddeford, Maine: The Maine community has plenty of reasons for making the list, including a low unemployment with projected job growth, a rising median sales price, and high affordability.

Median sales price (Q4 2010): $223,000
Median sales price % change (Q4 ’09-Q4 ’10): 8.3 percent
Foreclosure activity rate (2010): 1 in 150 units

5. Kennewick-Richland-Pasco, Wash.: Rising household income and a rise in the median price helped this Washington metro make Inman’s list.

Median sales price (Q4 2010): $183,000
Median sales price % change (Q4 ’09-Q4 ’10): 8.9 percent
Foreclosure activity rate (2010): 1 in 161 units

6. Fargo, N.D.-Minn.: This North Dakota community is becoming more desirable with its low unemployment (about 4 percent), which is lower than nearly any other state in the nation (the national average is about 9 percent).

Median sales price (Q4 2010): $148,500
>Median sales price % change (Q4 ’09-Q4 ’10): 6.2 percent
Foreclosure activity rate (2010): 1 in 7,423 units

Source: “10 Real Estate Markets to Watch in 2011,” Inman News (March 11, 2011)

Kennewick: A housing market to watch in 2011 (Inman)

Three structures at 300 Area of the U.S. Department of Energy's Handford Site are demolished with explosives on Oct. 9, 2010. Handford demolition and cleanup work is helping drive the Kennewick area economy. (Handford/U.S. Department of Energy)

The Kennewick area is one of “10 real estate markets to watch in 2011,” according to Inman News.

“(H)ousing appreciation in the Kennewick area remained modest while the rest of the country was experiencing a boom,” the real estate news service wrote Friday.

The metro area has fairly low unemployment compared to the national rate and was one of three markets on the list to see household income rise between 2008 and 2009. Population and in-migration from other states also rose during that time, each up 4.2 percent. Median sales price in the Kennewick market rose 8.9 percent from fourth-quarter 2009 to fourth-quarter 2010.

And there’s economic strength in Kennewick, Don Havre, broker at The Real Estate Firm there, told Inman.

We are a transportation hub with rail, barge traffic and (a) freeway network. Our economy includes agriculture, with its growing grape/wine market, high-tech companies like Infinia, which manufactures generators powered by the sun’s energy, Pacific Northwest Laboratory, and the Hanford Project.

Speaking of federal projects, the No. 1 market to watch was Washington, D.C. No other Northwest areas made the list.

Aubrey Cohen

Aubrey Cohen is the aerospace and real estate reporter for seattlepi.com.