Figuring Your Housing Budget
Have you ever shopped for clothes, furniture or gifts without a budget and later found that you had overspent? It’s easy to do, especially when looking at homes for sale.
Obviously, staying on budget is very important when house hunting. That’s why you need a general idea of how much house you can afford.
To get a rough estimate of how large a loan you’ll qualify for, do what the lenders do – plug your budget numbers into a basic mortgage calculation formula.
Lenders typically use one of two formula guidelines; although most will require that you meet both sets of guidelines.
Of the two usual formulas, the first compares income-to-housing costs (without including long-term debts), while the second includes all debts.
- 28 percent formula: Total monthly housing principal, interest, taxes and insurance (PITI) equals 28 percent or less of your gross monthly income.
- 36 percent formula: PITI plus all monthly debts equals 36 percent or less of gross monthly income.
So, if you’re a family with a monthly gross income (before taxes) of $3,500, you would multiply $3,500 by 28 and 36 percent. The result shows that you might qualify for a home mortgage with monthly payments between $980 and $1,260 a month.
Note that these percentages may be slightly less if you have long-term debts (more than eight months) or alimony and child support payments. The number and ages of your children as well as household budget items may also have an impact.
Even if you don’t meet the guidelines, talk with us and your mortgage consultant. He or she can provide additional details specific to your situation, and since there are other formulas that exist, you may qualify under another standard.
For example, VA loans are calculated on a single ratio that’s based upon mortgage payment and all debts. If you have very little debt, this formula may allow you to qualify more easily for a more expensive home.