You’ve been renting an apartment, but for a while now you’ve thought it might be time to buy a house. So, you (and 130 million people on Google) ask yourself: “How much house can I afford?” Before even considering homeownership, it’s important to know how much of your income you may allocate to your monthly mortgage budget.
Determining your mortgage budget
Mortgage lenders look at your personal information, including income, debt, expenses, and size of down payment when calculating affordability, and you should do the same. Make a list of all of your monthly income and expenses. Be as thorough as possible with expenses so you know exactly what you’re working (or not working with) each month.
Allocating your income
Once you have all of the figures in front of you, it’s time to determine how much you may allocate to housing. For years, economists recommended that housing should not account for more than 30 percent of your gross income before taxes; however, this percentage varies for many..
EXAMPLE: If your combined household income is $60,000 pre-tax, then at 30 percent, your mortgage budget may be $1,500 per month.
While sticking around 30 percent definitely won’t hurt you, there are other influences to consider. For instance, residents in New York City might justify paying 40 percent of their income to housing because it grants them access to better-paying jobs. The amount of income you make, the debt you have, and other lifestyle influences, such as jobs, location, and type of house, will determine your mortgage budget, but, in general, consider trying to keep it around 30 percent of your gross income. If you have a higher debt-to-income ratio or want to be more fiscally conservative, allocating 25 percent of your gross income to your mortgage budget is an option.
Expenses to include
When setting your mortgage budget, you need to keep in mind that homeownership costs aren’t just limited to your mortgage payment and interest. You also need to factor in the cost of property taxes, insurance, and other related expenses.
Once you’ve set your budget, you’re ready to begin exploring your mortgage options. Vylla makes it easy to get pre-qualified for the loan that’s right for you in eight easy steps. Start exploring now!