You’re not alone if you’ve wondered how much you can afford while home shopping. We all wonder the same thing.
But how do you figure out how much you can afford?
First, let’s look at what most lenders say.
How Much Home Can You Afford?
Lenders typically want your total debt-to-income ratio to be at or below 36 percent. That means no more than 36 percent of your monthly gross income will go toward paying your debts—and that figure includes your new mortgage.
Let’s say, for simplicity’s sake, that you make $1,000 per month. You currently pay $50 toward your debts each month. $50 out of $1,000 is just 5 percent; your debt-to-income ratio in this case is only 5 percent.
You could afford to add a mortgage payment of $310 and come in at a 36 percent debt-to-income ratio. That’s a total of $360 per month going toward your debts. $360 out of $1,000 is 36 percent.
Of course, those figures are unrealistic (unless you’re playing Monopoly).
Here’s what you can afford for your total debt-to-income ratio. Just remember to subtract all of your credit card bills, your car payments and other debts that you pay each month; what you’re left with is fairly close to the mortgage you can afford if you’re making:
$2,000 per month: $720 per month toward debt
$3,000 per month: $1,080 per month toward debt
$4,000 per month: $1,440 per month toward debt
$5,000 per month: $1,800 per month toward debt
$6,000 per month: $2,160 per month toward debt
$7,000 per month: $2,520 per month toward debt
Remember, you’ll have to subtract your current debts from those figures before you can determine how much you can afford to go to your mortgage.
Let’s say you make $7,000 per month and you currently pay $1,500 on your debts each month. Thirty-six percent of your income is $2,520, so subtract $1,500 from that.
$2,520 – $1,500 is $1,020. That means your mortgage can cost up to $1,020 per month.
Not every lender sticks to the 36 percent rule, though, so it’s best to shop around and make sure that you’re getting a loan at the best terms and that you can afford.
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