You’ve been thinking about buying a home but aren’t sure if your pocketbook is ready. Here are a few rules that can give you an idea if you can handle buying a home of your own:
Multiply your annual gross household income by three. Take what you and your spouse earn in one year before taxes and multiply it by three. If both of you earn $42,000, for example, that’s a household income of $84,000, which means that you could roughly afford a home at around $252,000. Keep in mind this is just a quick calculation that doesn’t take into account other factors that affect how much you can borrow, such as your existing debt load, mortgage rates and how much money you’ve saved for a down payment.
Calculate 28 percent of your monthly gross household income. This rule can give you a more accurate picture of what you can afford. Most lenders want borrowers to have a monthly payment that’s no more than 28% of their gross income. Don’t forget your monthly mortgage payment includes principal and interest, real estate taxes and homeowner’s insurance. For the married couple with a household income of $84,000, or $7,000 per month, their monthly mortgage payment should be no more than $1,960.
Calculate 36 percent of your monthly gross household income. So far so good? This third rule of thumb takes into account all of your debt, including credit card balances, car loans, personal loans, student loans and anything else you’re on the hook for. That means the couple earning $84,000 annually, or $7,000 per month, would likely have to keep their total monthly debt payments to $2,520, including their mortgage payment.
Of course, there are more sophisticated online calculators that can help you better hone in on how much of a mortgage payment you can afford. The most accurate way to know how much home you can buy, though, is to get preapproved with a mortgage lender. Being preapproved for a mortgage starts with meeting with a loan officer who can review your financial information and credit files and let you know what type of mortgage and loan amount you qualify for. In today’s real estate market, most sellers won’t even accept an offer from a seller who isn’t preapproved!