How Much Mortgage Can You Afford?

As a general rule, according to Yahoo Finance, a mortgage lender will allow you to borrow the amount of money at which your monthly loan payments equal 28 percent of your gross monthly income. However, there may be some wiggle room if you have good credit. Plus, your total debt payments cannot exceed 36 percent of your monthly income.
While this guideline tells you how much you can afford to borrow for your mortgage, the resulting number isn’t necessarily the amount you should borrow. Read on to find three steps to help you determine how much you should really spend on your new home.
1. Set a Budget
Before determining how much money to allocate toward a mortgage payment, you must first set a budget which includes both short-term and long-term savings. While taking into consideration monthly utility bills, groceries, car payments, credit card payments and other debt, make sure you also have enough short-term savings to pay your mortgage for at least six months in the event of unforeseen circumstances. Additionally, do not reduce your long-term savings goals, such as retirement or college funds, for your mortgage.
2. Consider Increased Expenses
When setting your budget, there are some increased expenses you must consider. While things like car payments and groceries won’t change, other payments like utilities, homeowners insurance and property taxes will likely go up. You must also factor in things you might not have had to worry about before like lawn care, pool maintenance and homeowners’ association fees.
3. Determine an Ideal Mortgage Payment
After setting your budget and taking into consideration any increased expenses, you will be able to see how much money you can really afford to allocate toward a mortgage payment. If the amount you can afford is less than the amount you want to borrow, it may be necessary to make some lifestyle changes. For example, consider reducing the amount you spend on vacations, dining out and even your monthly cable subscription so you can put more of your money toward a mortgage payment. These tiny changes will add up to a larger amount of cash that can help you afford your dream home.