ANSWERS: 1
  • The best way to determine how much you should spend on a mortgage is to first examine what the lending institutions consider to be a safe amount, and then add some logic to it based on your available resources. The most important thing to remember is that just because the bank preapproved you for a larger mortgage than you expected does not mean you should get a larger mortgage than you can afford.

    Ratios and Percentages

    General guidelines suggest that your mortgage payment should be no more than 31 percent of your gross monthly income and that your income-to-debt ratio should be no more than 40 percent of your gross monthly income. An income-to-debt ratio takes all your monthly obligations, including mortgage payment, insurance, utilities and credit bills, and compares that to your gross monthly income. You do not figure in expenses such as gas for the car or groceries. Most lenders use these guidelines when figuring how much of your income should go to a mortgage payment, but keep in mind that this is gross income and does not take into account income taxes, health insurance or other deductions from your paycheck.

    Real Costs

    Mortgage lenders also don't consider property taxes and homeowners insurance in calculating your pre-approval amount. If you are purchasing a property that requires $2,000 a year in property taxes and $600 a year in homeowners insurance, that will add at least $220 a month to your mortgage for escrow. For example, if you plan to use the full 31 percent for your payment estimate, and your gross monthly income is $3,000, you can afford a payment of $930. If you will be paying $2,600 a year in taxes and insurance, you must subtract $220 a month from your payment, meaning your mortgage payment can be only $710.

    Considerations

    Property taxes and homeowner insurance rates traditionally go up, so even if your mortgage payment stays the same, you may still gradually pay more per month as your other costs increase. Securing a mortgage you can easily afford now will help you absorb cost increases over the life of the loan. Owning a home also means paying for maintenance costs, such as repairs and landscaping, out of your pocket. Avoid getting a mortgage that does not leave you enough to make the occasional necessary repair.

    Source:

    Freddie Mac - How Much Can You Afford to Spend on a House?

    BetterBudgeting.com - How Much Should I Spend On Housing?

    MSN Money - Don't Bite Off Too Much House

    Resource:

    Kiplinger - How Much Can You Spend for Housing?

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