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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 gross income you are comfortable spending on your total monthly housing expense plus other monthly debt expense such as credit card, car and student loans as well as spousal and child support payments, 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).

    Typically, lenders permit borrowers to spend a maximum of approximately 50% of their monthly gross income on total monthly housing expense plus other monthly debt payments for a maximum debt-to-income ratio of 50%.  Your debt-to-income ratio is the maximum percentage of your monthly gross income that you are permitted to spend on monthly debt payments, including your mortgage payment, and lenders use the your debt-to-income ratio to determine what size mortgage you can afford.  We should emphasize that your debt-to-income ratio is based on your monthly  gross income, or pay before any deductions such as taxes, social security, medicare and retirement account contributions.  Additionally, the debt component for your debt-to-income ratio is based on your monthly debt payments, and not your total debt balance.  For example, if you make a $300 monthly car loan payment on a $10,000 car loan, the $300 figure is included in your debt to calculate your debt-to-income ratio and not your $10,000 loan balance.

    • Use our MORTGAGE QUALIFICATION CALCULATOR to determine what size mortgage you can afford based on your monthly gross income, debt payments and current mortgage rates

    While your debt-to-income ratio determines how much you are permitted to spend on total monthly housing expense plus your other monthly debt payments, in order to determine what size mortgage you can afford, you need to determine what size mortgage payment you can afford, and the best way to do that is to work backwards.  Your debt-to-income ratio indicates how much you can spend on total monthly housing expense plus other monthly debt payments so if you subtract your other monthly debt payments from this figure then you know how much you can spend on total monthly housing expense.  For example, if you make $6,000 in monthly gross income and have $500 in monthly debt expense, applying a debt-to-income ratio of 50% means that you can spend $3,000 on total monthly housing expense plus other debt payments ($6,000 * 50% = $3,000).  If you subtract $500 in non-housing related debt payments from $3,000 you get $2,500, which is the amount you can spend on total monthly housing expense.  The good news is the less monthly debt you have, the more you can spend total monthly housing expense and on your mortgage payment, which means you can afford a larger mortgage amount.  The two examples at the bottom of the page show how a debt-to-income ratio works and illustrate how to determine what size mortgage you can afford based on different monthly debt levels.

    In addition to including your mortgage payment, total monthly housing expense includes property tax, homeowners insurance as well as other applicable costs so we need to subtract all these non-mortgage housing expenses to determine what size monthly mortgage payment you can afford. For example, if property taxes, insurance and other non-mortgage monthly housing expenses are $300, that means you can afford a monthly mortgage payment of $2,200 in this example ($2,500 - $300 = $2,200).

    After you determine what monthly mortgage payment you can afford, you can determine what size mortgage you can afford based on your mortgage rate, mortgage program and the length of your loan. The lower your mortgage rate, the larger the mortgage you can afford because your interest expense is less. The mortgage program you select also impacts what size mortgage you can afford. An adjustable rate mortgage (ARM) or interest only mortgage typically enable you to afford a higher loan amount than a fixed rate mortgage because your initial interest rate and monthly mortgage payment are lower. It is important to highlight that your mortgage rate and monthly payment can change and potentially increase with an ARM or interest only mortgage so you need to make sure that you can afford the mortgage and payment over the duration of the loan. The length of your mortgage, or mortgage term, also determines what size mortgage you can afford. Longer term loans, such as a 30 year mortgage, enable borrowers to afford a larger mortgage because the monthly payment is lower than for a loan with a shorter term, such as 15 year mortgage. When deciding what size mortgage you can afford be sure to consider the mortgage rate, mortgage program and loan term in your decision-making process.

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  • 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.

    Additionally, just because you qualify for a certain mortgage amount according to a lender does not mean that is the right size mortgage for you. The most important factor in determining what size mortgage you can afford is to be comfortable with both your monthly mortgage payment as well as total monthly housing expense in both the short and long term.  Borrowers should make sure that they can afford the mortgage payment, property tax, homeowners insurance and other housing-related expenses and that these costs fit within their monthly budget in light of their income and other spending.  The worst outcome when you get a mortgage is that you end up with a monthly payment that you cannot afford. Regardless of what a lender tells you, it is ultimately up to you, the borrower, to select a mortgage amount that you can afford.

  • 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 payments, 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 $6,500 in monthly gross income and has $500 in other monthly debt expenses and apply the 50% debt-to-income ratio guideline to determine what size mortgage the borrower can afford.

Borrower Mortgage Affordability Example #1
Application of Debt-to-Income Ratio Results
50% Debt-to-Income Ratio 50% of the borrower's monthly gross income equals $3,250
  • 50% * $6,500 in monthly gross income (debt-to-income ratio) = $3,250 in total monthly debt payments including monthly housing expense and non-housing debt payments
  • $3,250 - $500 in non-housing monthly debt payments = $2,750 in total monthly housing expense
  • $2,750 - $565 in property tax and insurance = $2,185 monthly mortgage payment
Mortgage Size
Mortgage Affordability
  • Based on the amount of monthly gross income that the borrower should spend on his or her mortgage payment and total monthly housing expense, the borrower can afford a mortgage of $471,495
  • Mortgage Affordability is based on a 30 year fixed rate mortgage at a 3.750% 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 $6,500 in monthly gross income but has only $100 in monthly debt expense and apply the debt-to-income ratio guideline to determine what size of mortgage the borrower can afford.  This example illustrates that the lower your monthly debt expense, the higher the larger the mortgage you can afford.

Borrower Mortgage Affordability Example #2
Application of Debt-to-Income Ratio Results
50% Debt-to-Income Ratio 50% of the borrower's monthly gross income equals $3,250
  • 50% * $6,500 in monthly gross income (debt-to-income ratio) = $3,250 in total monthly debt payments including monthly housing expense and non-housing debt payments
  • $3,250 - $100 in non-housing monthly debt payments = $3,150 in total monthly housing expense
  • $3,150 - $650 in property tax and insurance = $2,500 monthly 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 $540,000
  • Mortgage Affordability is based on a 30 year fixed rate mortgage at a 3.750% interest rate
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