A lender can approve you for a mortgage, but that doesn’t mean you will be able to comfortably afford it. Online mortgage calculators can help determine how much house you will be able to afford, but it also is important to consider your personal financial situation. Here, Trulia explains why you can’t rely solely on a calculator to tell you how much house you can really afford.
Financial rules of thumb may not apply to you
One rule of thumb is that your mortgage payment shouldn’t take up more than 35 percent of your monthly income. That seems like a straightforward figure, but your financial picture is more complicated than that number would make things appear. Your ideal monthly housing costs could vary depending on factors, such as debt, other monthly payment obligations and how much you’ve saved for a down payment. If you have high credit scores and a clean financial background, a mortgage calculator can be a great starting point for mortgage shopping. You’ll get a much better sense of what your price range might be instead of a blanket rule of thumb. But they’re only as accurate as the information you provide. You won’t get a complete picture if you forget to add regular budget line items, such as food, day care or fuel costs.
Your lender might approve you for more than you can realistically afford
Lenders are legally required to ensure borrowers can reasonably afford to repay a loan before they approve a new mortgage. But there’s a difference between being able to reasonably afford something and being able to realistically afford something. When looking at what’s reasonable, lenders account for your income and any current debts that you need to repay each month. If you make $5,000 per month after taxes and need to pay $500 toward your car loan each month, a mortgage payment of $1,500 may seem perfectly reasonable. That means you’d have about $3,000 per month left over to handle all of your other expenses. And perhaps you can afford your living expenses on this budget. But what about the other goals you want to achieve, like saving for retirement or investing for your future? If you commit to a large monthly mortgage payment, you may find yourself squeezed to make your remaining cash cover your living expenses, plus monthly bills and loan repayments.
You’re the only one who can determine what’s comfortable
Only you can examine your life and values to determine what you are willing to spend on your mortgage budget—and what you’re not. You might be perfectly happy to take on a larger monthly mortgage payment in exchange for not going out to eat as much or cutting back on vacations. Or you might decide that renting makes more sense for you because you can mitigate costs, take on less financial responsibility and enjoy more flexibility. Either way, you should decide what works within both your budget and your long-term plans to reach goals that matter to you.
Ask yourself these questions to decide how much house you can really afford
Once you set your financial priorities, here’s where you’ll need to do the math:
• What’s my current income? What are my basic living expenses? What are my fixed costs?
• How much do I want to put away each month into savings or investments?
• How much will it cost to maintain my new home?
• What kind of down payment do I have? (The more you put down, the smaller your monthly mortgage payment will be.)
Now you can factor a mortgage into all of the above, and see how much you can really afford. When doing so, don’t forget to count both the mortgage principal and interest—along with property taxes, homeowner’s insurance and other extras such as HOA fees.