The Real Estate
Consumer Review

How To Find Out How Much House You Can Afford

Before you even start out looking for a new home you really should find out for sure how much house you can really afford. This will be important to know in advance because there is no sense getting all excited about buying a particular house only to find that it is out of your price range and you are not able to get any lenders to give you a mortgage on it. So how do mortgage lenders figure out how much house they feel you can afford anyway?

The main way this is done is through something called the debt to income ratio and it is usually represented as two figures in a ratio like this: 35/40. The first number has to do with what percentage of your income will go toward paying your costs associated with buying a particluar house including the mortage itself, taxes, insurance, homeowners fees and so forth. The second figure uses the same information and then adds on the amount of consumer debt that you are currently carrying including car payments, credit card debt, and any other installment loans.

In general most lenders expect that expenses associated with your home should be around 33% percent of your monthly income, and that makes up the first figure of the ratio. They often do not like to see the second figure go above 40% or so. If you want to get a general idea then of how much house you can afford to buy, you first have to figure out what your monthly income is. If you work at a job where you are paid by the hour this is very simple. Just go back on your W-2 forms over the last two years, add them together and then divide by 24. If you are self-employed, you will have to submit your IRS tax returns for the past two years and use the profit listed there as your income. Add the two figures together and divide by 24.

Now that you have your income established, go over your monthly creditor bills, not including insurance, utilities, food and the like, and get a monthly average. If you then take your monthly income and establish what 40% of that would be, you then subtract your average monthly creditor payments from that figure and you should have a rough idea of how much you can afford to pay each month for all of your housing costs.

From this point you can use any of the free mortage calculators online to find out how much a house woould usually cost for the mortage payment that you can afford. Then as you go about house hunting do your best to try and stay in that general price range.

This procedure may seem a little compicated at first, but once you have sat down and worked it out once, you will be able to do it over and over again in the future much easier and quicker, and you will be able to know how much house you can afford at all times.