Here are four general rules of mortgage affordability you can use to help you determine how much debt you can handle when buying a home.
- What is your Income?
You can typically afford a home priced two to three times your gross income. So if you earn $100,000, you can usually afford a home between $200,000 and $300,000.
- What is your Overall Debt?
The “28/41 rule” says your monthly mortgage payments (PITI – principal, interest, taxes, and insurance) shouldn’t total more than 28% of your gross annual income. Your monthly payments for all of your debt or any other regular obligation (PITI, car payments, utilities, and credit cards, etc.), shouldn’t exceed 41% of your gross annual income.
- How much Money can you put Down?
The higher your down payment, the lower your monthly payments will be. If you are able to put down 20% of the home’s cost, you may not have to get mortgage insurance, which can deduct hundreds from your payments each month. More money down means you can get a larger loan and buy more house.
- How much Rent do you Pay?
The tax benefits of home ownership generally allow you to afford a mortgage payment, including PITI, of about one-third more than your current rent payment. Multiply your current rent by 1.33 to arrive at a rough estimate of how much that can be. For example, if you currently pay $1,500 per month in rent, you should be able to afford a $2,000 monthly mortgage payment. The determination of how much you can actually afford needs to be made by a lender. So doing that – not going out looking – is the first step in buying a home.
Ultimately that qualifying process leads to underwriting, or the actual loan approval process. To read how that can go bad, read my last blog “Have you Been Tortured by a Lender?” I can help you obtain a mortgage and with the home buying process. Contact me at 480 675-0112 or firstname.lastname@example.org.
Mr. Kramoltz, JD, GRI, CIPS is the Designated Broker for SimplySOLD Arizona, a boutique real estate brokerage that specializes in the global marketplace. Mr. Kramoltz writes articles that provide valuable and unique information on local and international real estate issues from his perspective as a real estate attorney, an Arizona Department of Real Estate certified instructor, and an active licensee. Check SimplySOLD’s Facebook page regularly, follow him on twitter @azpropexpert, and visit www.simplysoldaz.com for prior blogs, properties for sale, and more on Arizona real estate.
N. Mark Kramoltz © 2014, All Rights Reserved.