Tips for Determining How Much Mortgage You Can Afford Provided by DBL Real Estate

Mortgage Tips

Home-ownership should make you feel safe and secure, and that includes financially. DBL Real Estate has compiled a list of tips for helping you know how much mortgage your budget can handle.

DBL Real Estate Tip #1: Prepare a Detailed Budget

The oldest rule of thumb says you can generally afford a home priced two to three times your gross income. For example, if you earn $100,000, you can usually afford a home between $200,000 and $300,000. However, this is not ideal because it does not consider your monthly expenses and debts, which greatly influence how much you can afford. If you earn $100,000 a year but have $1,000 monthly payments for student debt, car loans and credit card minimum payments, then you don’t have as much money to pay your mortgage as someone earning the same income with no debts.

Ideally, you should prepare a family budget that keeps track of your ongoing monthly bills for everything — credit cards, car and student loans, lunch and work, daycare, date night, vacations and savings. Then, see what is left over to spend on home-ownership costs, such as your mortgage, property taxes, insurance, maintenance, utilities and community association fees, if applicable.

DBL Real Estate Tip #2: Factor in Your Down-Payment

The higher your down-payment, the lower your monthly payments will be. If you put down at least 20 percent of the home’s cost, you may not have to get private mortgage insurance. This protects the lender if you default and costs hundreds each month, leaving more money on your mortgage payment.

Conversely, the higher the loan amount you’ll need to qualify, the lower your down-payment is. Therefore, your monthly mortgage payment will be higher. However, if interest rates and/or home prices are increasing and you wait to buy until you accumulate a bigger down-payment, you may end up paying more for your home.

DBL Real Estate Tip #3: Consider Your Overall Debt

Typically, lenders follow the 43 percent rule. This means that your monthly payments covering your home loan principal, interest, taxes and insurance, in addition to other bills, such as car loans, utilities and credit cards should not exceed 43 percent of your gross annual income.

DBL Real Estate has put together an example of how the 43% calculation works for home-buyer making $100,000 a year before taxes:

Multiply your gross annual income of $100,000 by 43% to get $43,000 in annual income.
Divide $43,000 by 12 months to convert the annual 43% limit into a monthly upper limit of $3,583.
All of your monthly bills including your potential mortgage can’t go above #3,583 per month.
You may find a lender willing to give you a mortgage with a payment that goes above the 43% line, but consider this carefully before accepting. Evidence from studies of mortgage loans suggest that borrowers who go over the limit are more likely to run into trouble making monthly payments, the Consumer Financial Protection Bureau warns.

DBL Real Estate Tip #4: Use Your Rent as a Mortgage Guide

Typically, the tax benefits of home-ownership help make a mortgage payment of about one-third more than your current rent payment affordable without changing your lifestyle. Your current rent can be multiplied by 1.33 to arrive at a rough estimate of a mortgage payment. For example, if you are currently paying $1,500 per month in rent, then you should be able to comfortably afford a $2,000 monthly mortgage payment after factoring in the tax benefits of home-ownership.

However, if you are having difficulty keeping up with your rent, buy a home that will give you the same payment rather than going up to a higher monthly payment. You will have additional costs for home-ownership that your landlord now covers, such as property taxes and repairs.

 

It is important to consider whether or not you will itemize your deductions. If you take the standard deduction, you can’t also deduct mortgage interest payments. Talking to a tax advisor, or utilizing a tax software program to do a “what if” tax return, can assist with your tax situation. Don’t hesitate to contact us here at DBL Real Estate with the link below for more information!

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