If you are planning to purchase a home, you will probably wonder how expensive a home you can afford. That will depend on the answer to another question of how much mortgage you can afford to pay. This is easy to calculate so you can start your search for a home you love and can afford.

Preparing for a Mortgage

Pay off as much of your debt as you can before applying for a mortgage. This will reduce your debt-to-income ratio and allow you to qualify for and afford a larger mortgage. Consider saving up for a down payment as well. You may qualify for a mortgage without one, but having a down payment will reduce the amount you need to borrow. If you have a down payment of 20 percent or more, you will also be able to avoid purchasing primary mortgage insurance, or PMI. This can save you hundreds of dollars on your monthly payment.

Do the Math

Figure out the maximum amount you would like to borrow. You can do this by searching for properties for sale in your desired area. Your mortgage payment will include principal, interest, PMI if you are required to pay it, and escrow for property tax and home insurance. The payment should be no more than 28 percent of your monthly pre-tax income. Add all your other monthly bills together with the mortgage amount. This total amount should be no more than 35 percent of your monthly pre-tax income. The Federal Housing Administration, or FHA, has a mortgage calculator on its website.

Choose a Mortgage Length

The typical mortgage length has traditionally been 30 years. But you might prefer a 15-year mortgage. With a 15-year mortgage, you will pay much less in interest over the life of the loan, but your monthly payments will be higher. The Bloomberg website has a calculator to help you compare the two mortgage lengths and choose the right one for you. You can also choose to take a 30-year mortgage and make extra payments toward the principal whenever possible to decrease the length of your mortgage in a more affordable way.

Mortgage Approval

Shop around for your mortgage. Different lenders offer different interest rates. A difference of as little as 1 percent can mean big savings over the life of your mortgage. A lower interest rate might mean you can afford a more expensive home. The bank might approve you for a larger amount than you are comfortable borrowing. You do not have to use the entire amount. Buy a home that will leave you with a mortgage amount you are comfortable with and feel you can realistically afford each month.

Source:

Income Guidelines

Compare Mortgage Lengths

Resource:

FHA Mortgage Calculator

15 Year vs. 30 Year Mortgage Calculator