Six easy steps to find out.
1. Calculate your gross monthly income (the amount you make before deductions). Add your spouse’s gross monthly income, if any.
2. Multiply the income amount by 36% (.36). This is called the debt ratio.
3. Then subtract long-term monthly debts (more than 10 months), such as car loan payments, personal loans, alimony, child support, or regular payments toward a credit card balance. This is the generally-accepted standard lenders use to determine what borrowers can afford, after a down payment of 10%. Some lenders and mortgage plans apply more or less strict factors, such as 33% with a 5% down payment or 38% with a 20% down payment.
4. Also, many lenders calculate a housing ratio of 28% times gross monthly income. The result does not take into account long-term monthly debts. To qualify for a mortgage, lenders may require ratios of, say 28/36. The first number means the maximum mortgage payment you qualify for could be up to 28% of gross income (.28); the second number means the maximum mortgage payment plus monthly debts could be up to 36% of gross income (.36).
5. Take a “guesstimate” of average annual real estate taxes in your area, plus the annual cost of homeowner’s insurance. Divide by 12 to obtain a monthly figure. (On average, the monthly cost of these two items might be about one-tenth of 1% of the home purchase price. Ask us about your specific situation.)
6. Deduct the monthly taxes and insurance cost from both figures you arrived at in Steps 3 and 4. The result is the ballpark monthly payment on principal and interest you can afford to pay on a mortgage.