One of the most important questions you need to ask yourself in the home buying process is: How much can I pay for a house and still have a life
Ultimately, only you can decide what you can afford to spend monthly on a house payment and still be able to live the lifestyle you wish. However, a calculation provided by your mortgage lender may help you to make your determination.
When applying for a home loan, your mortgage lender will do a calculation that reveals the maximum amount the lender will lend to you. The calculation is based on a simple formula: The proposed house payment plus any fixed monthly debt payments (like credit cards and car payments) divided by your gross monthly income (your total wages before taxes are taken out) equals a percentage. Typically, mortgage lenders want that percentage to be less than 42%.
This equation is illustrated in the example below:
$1,230 (House Payment + Fixed Monthly Debt)
3,000 (Gross Monthly Income)
Based upon this equation, after adding up your debts and reviewing your income, you may discover you can afford a pretty big mortgage payment. On the other hand, you may want to look at that number a little closer. If you borrow the maximum amount allowed, you may find that your house payment is more than you can afford based on other monthly expenditures not accounted for in the equation. For instance, the equation doesn t take into consideration money you might spend on recreation activities. If these are important to you and you don t want to give them up, you may need to keep your house payment lower than the maximum allowed in order to pay for these other expenditures.
Your best bet is to develop a budget and consider all of the typical expenses you have.
Use the form below to add up all of your monthly expenses. If there are some expenses like auto insurance you only pay every six months or yearly, divide by the number of months to determine your monthly expense. It s best to get everything down on paper.
Take a few minutes now and create your budget by listing the major categories where you think you have or will spend money during a typical month.
My Monthly Budget
$ ___________ Estimated house payment & association fees
$ ___________ Estimated property taxes, insurance, PMI
$ ___________ Electricity, gas
$ ___________ Phone
$ ___________ Water, sewage, garbage
$ ___________ Groceries
$ ___________ Fast Food
$ ___________ Dining out
$ ___________ Beverages
Other living expenses
$ ___________ Personal care (hair, toiletries)
$ ___________ Laundry and dry cleaning
$ ___________ Clothing/shoes/hats
$ ___________ Gifts
$ ___________ Monthly membership dues/subscriptions
$ ___________ Car payments
$ ___________ Gas & oil
$ ___________ Normal car maintenance
$ ___________ License and registration fees
$ ___________ Auto insurance
$ ___________ Parking fees
$ ___________ Bus, taxi, subway, carpool
Educational expenses (if applicable)
$ ___________ Tuition
$ ___________ Books
$ ___________ Lab fees
$ ___________ School supplies
Childcare and pet care (if applicable)
$ ___________ Day care
$ ___________ Baby/pet sitters
$ ___________ Medical/Veterinary
$ ___________ Toys
$ ___________ Special foods
$ ___________ Clothes
Expecting the unexpected
$ ___________ Traffic Tickets
$ ___________ Car Repairs
$ ___________ Medical/Dental care
(Insert other categories unique to you here)
$ ___________ ____________________________
$ ___________ ____________________________
$ ___________ Total Monthly Expenditures
* Taxes, insurance and PMI (private mortgage insurance) costs vary. Your real estate agent can help you estimate these.
Next, determine your monthly income below:
Wages and tips
$ ___________ (less taxes and other deductions)
$ ___________ Investment Income
$ ___________ Other
$ ___________ Total net monthly income
Finally, subtract your total monthly expenditures from your total monthly income. Note: Your net income, used in determining what you can afford, is different than your gross income, used to determine what you qualify to borrow.
$ ________ Total Monthly Income: (transfer $ amount from above)
– $ ________ Total Expenditures: (total of your expenses above)
= $ ________ Ending Balance
Now that you have everything down on paper, borrowing the maximum allowed may not look too good anymore! You may want to consider buying a little less house to keep a little more of your life! You may have heard the term House rich, cash poor. That phrase was coined by people who didn t budget beforehand!
Finally, once you have a general idea of what type of house payment you can afford each month, you ll want to determine what that monthly payment will buy you in terms of the selling price of a home. Based on your estimated monthly payment, should you be looking at homes selling in the $100,000, 200,000, or $300,000 price range Your real estate agent can estimate this for you, or you can check out a mortgage calculator on-line, which will ask a few simple questions and then do the calculation for you.