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What Size Mortgage Can I Afford?

What Size Mortgage Can I Afford?

  • Determining What Size Mortgage I Can Afford
  • One of the best ways to think about mortgage affordability is to figure out how much of your net income you want to spend on your: 1) mortgage payment; 2) total monthly housing expense (MHE); and, 3) total monthly housing expense plus other debt (such as credit card, car and student loans and spousal support, if applicable).  Total monthly housing expense includes your monthly mortgage payment plus other housing-related expenses such as property tax and homeowners insurance as well as other potentially applicable expenses such as homeowners association (HOA) fees, private mortgage insurance (PMI) or FHA mortgage insurance premium (MIP).

    Based on many years of experience we have found that borrowers spend a certain amount of their net income on their 1) mortgage payment; 2) total monthly housing expense; and, 3) total monthly housing expense plus other debt:

    • Borrowers typically spend approximately 43% of their net income on their mortgage payment
    • Borrowers typically spend approximately 52% of their net income on total monthly housing expense
    • Borrowers typically spend approximately 62% of their net income on total monthly housing expense plus other monthly debt payments

    These guideline are not hard and fast rules but serve as good guides for borrowers.  We should also emphasize that these guidelines are based on a borrower's net income, or take-home pay after deductions such as taxes, social security and medicare.

    The good news according to these guidelines is the less monthly debt you have, the more you can spend on your mortgage payment and total monthly housing expense, which means you can afford a larger mortgage amount.  After you determine how much of your monthly net income you are comfortable spending on your mortgage payment and total monthly housing expense, you can calculate how big of a mortgage you can afford.  

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    What Size Mortgage Can I Afford? Instructional Video

  • It is important to highlight that being able to afford a certain mortgage amount does not necessarily mean that you will be able to qualify for that mortgage amount.  Just because you can afford a monthly mortgage payment for a certain size mortgage does not always mean that a lender will lend you that amount of money.  What size mortgage you can afford may be different than what size mortgage you qualify for and there are several factors that influence your ability to qualify for a mortgage including: your credit score and credit report, down payment amount and your type of employment and employment history.

  • Example: What Size Mortgage Can I Afford?
  • The two examples below illustrate how you can determine what size mortgage you can afford.  The examples demonstrate how mortgage affordability is impacted by non-housing related monthly debt expenses such as auto and student loans, credit card debt and spousal support, if applicable.  The examples demonstrate that the less monthly debt you have, the larger the mortgage you can afford.

    In the first example we look at a borrower that makes $4,235 in monthly net income and has $425 in other monthly debt expenses and apply the 43%, 52% and 62% guidelines to determine what size of mortgage the borrower can afford.

Borrower Mortgage Affordability Example #1
Application of Guideline Results
43% Guideline 43% of the borrower's net income of $4,235 equals $1,820
  • The borrower can afford a monthly mortgage payment of $1,820
52% Guideline 52% of the borrower's net income equals $2,200
  • The borrower can afford $2,200 in total monthly housing expense (mortgage payment plus property taxes and insurance)
62% Guideline 62% of the borrower's net income equals $2,625
  • The borrower can afford to spend $2,625 on total monthly housing expense and all other debt expenses
Mortgage Size
Mortgage Affordability
  • Based on the amount of monthly net income that the borrower should spend on his or her mortgage payment and total monthly housing expense, the borrower can afford a mortgage of $380,000
  • Mortgage Affordability is based on a 30 year fixed rate mortgage at a 4.0% interest rate
  • A change in interest rate or mortgage term will change the size of mortgage the borrower can afford
  • The Loan-to-Value ratio (LTV) and type of mortgage program you select may also impact the size of mortgage you can afford
    • If your LTV is greater than 80%, you may be required to pay private mortgage insurance, or PMI, which is an extra ongoing cost in addition to your monthly mortgage payment and therefore reduces the size of mortgage you can afford
    • If you select an FHA mortgage program, you will be required to pay a Mortgage Insurance Premium (MIP), which is an extra up-front and ongoing cost in addition to your monthly mortgage payment and therefore reduces the size of the mortgage you can afford

    In the second example below we look at a borrower that makes $4,235 in monthly net income but has only $225 in monthly debt expenses and apply the guidelines to determine what size of mortgage the borrower can afford.  Because the borrower in this example has less monthly debt he or she can exceed the 43% and 52% guidelines and afford a bigger mortgage.  This example demonstrates that the 43%, 52% and 62% guidelines are not set in stone but rather are guidelines that can be influence by several factors.

Borrower Mortgage Affordability Example #2
Result Key Takeaways
62% Guideline 62% of the borrower's monthly net income equals $2,625
  • The borrower can afford to spend $2,625 on total monthly housing expense and all other debt expenses
Total Monthly Housing Expense The borrower can spend $2,400 on total monthly housing expense
  • The borrower can afford $2,400 in total monthly housing expense ($2,625 in total monthly housing expense minus $225 in other non-housing monthly debt expenses)
Monthly Mortgage Payment The borrower can afford a monthly mortgage payment of $2,020
  • The borrower can afford a monthly mortgage payment of $2,020, which represents 48% of the borrower's net income
  • The borrower can afford to spend more than 43% of his or her monthly net income on the monthly mortgage payment because the less non-housing monthly debt you have the more you can spend on your mortgage payment
Mortgage Size
Mortgage Affordability
  • In this example, based on the lower amount of non-housing monthly debt that the borrower has, the borrower can afford a larger mortgage amount of $423,000
  • Mortgage Affordability is based on a 30 year fixed rate mortgage at a 4.0% interest rate
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    P & I More Info
    Principal & Interest: A periodic payment, usually paid monthly, that includes the interest charges for the period plus an amount applied to the reduction of the principal balance.
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    Mortgage Insurance: The monthly cost for a policy that protects the lender in case you’re unable to repay the full amount of the loan. It is typically required for loans that have a loan-to-value ratio between 80% to 100%.
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    Property Tax: (Also called "Real Estate Tax.") Property taxes are government assessments on real estate property. With mortgage financing, the local, county or state tax assessment on real estate property is considered part of the monthly housing obligation and typically collected and set aside by the lender ...
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    Homeowner Insurance: or also commonly called hazard insurance, is the type of property insurance that covers private homes. It is an insurance policy that combines various personal insurance protections, which can include losses occurring to one’s home, its contents, loss of its use, or loss of other personal possessions of the homeowner, as well as liability insurance for accidents that may happen at the home or at the hands of the homeowner within the policy territory.lender ...
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    Other fees could be either additional Administrative Fees that a lender charges or it could be a Flat Fee to cover all lender charges such as: (Origination Fees, Points, Underwriting and Processing Fees, Credit Reports and Tax Service Fees)

    The flat fee does not include prepaid items and third party costs such as appraisal fees, recording fees, prepaid interest, property & transfer taxes, homeowners insurance, borrower’s attorney’s fees, private mortgage insurance premiums (if applicable), survey costs, title insurance and related services.

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