Figuring Your Housing Budget
Have you ever shopped for clothes, furniture or gifts without a budget and later found that you'd overspent? It's easy to do especially when looking at so many great houses with your agent. Obviously, staying on budget is very important when house hunting.
That's why you'd probably like to have a ballpark idea of how much house you can afford - before you start looking and even before meeting with your mortgage broker or lender.
To get a rough estimate of how much you'll qualify for, do what the lenders do – plug your budget numbers into a basic mortgage calculation formula.
Lender FormulasLenders typically use one of two formula guidelines; although most will require that you meet both sets of guidelines. Even if you don't meet the guidelines, talk with your chosen home mortgage consultant. S/he can provide additional details specific to your situation, and since there are other formulas that exist, you may qualify under another standard. For example, VA loans are calculated on a single ratio that's based upon mortgage payment and all debts. If you have very little debt, this formula may allow you to qualify more easily for a more expensive home.
Of the two usual formulas, the first compares income-to-housing costs (without including long-term debts), while the second includes all debts.
28 Percent Formula
Total monthly housing costs (P.I.T.I.) = 28 percent (or less) of gross monthly income.
36 Percent Formula
P.I.T.I. + all monthly debts = 36 percent (or less) of gross monthly Income.
So, if you're a family with a monthly gross income (before taxes) of $3,500, you would multiply $3,500 by 28 and 36 percent. The result shows that you might qualify for a home mortgage with monthly payments between $980 and $1,260 a month.
Note that these percentages may be slightly less if you have long-term debts (more than eight months) or alimony/child support payments. The number and ages of your children as well as household budget items may also have an impact.
Now that you have a better idea of what your approximate housing budget may be, learn more about:
Types of Loans
Mortgage Strategies
The Loan Application
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