Calculating An Affordable Mortgage Payment
by: James Iaccobucci
To calculate a comfortably affordable home price, most banks follow guidelines that are very similar to each other. Mortgage professionals will generally maximally allow a total debt-to-income ratio of no more than 36% in almost all cases as an utmost maximum and even then such a high debt to income ratio getting approved is very rare indeed. Mortgage lenders generally like to see a monthly housing payment to income ratio of between 28% and 33%. This simply means that you subtract your monthly debt payments from your monthly income and then multiple that by 0.28 for the conservative end of things and 0.33 for the high end of the spectrum. That will give you the monthly payment that most mortgage lenders will feel comfortable with and you have a better chance of successfully getting approved for a home loan if you don't apply for a mortgage that goes above this threshold.
However, before you go out and purchase a new home you should also figure in other future needs, including your children's college fund or possibly your retirement savings, even if you aren't paying into these now, you may need to in the future, so its best to consider all possibilities before taking out a 30 year loan even though the bank approved your application.
Another thing that people often forget to factor in are the PMI or Private Mortgage Insurance premiums that are often required for borrowers that have a high debt to loan value ratio. PMI is basically an insurance policy that the borrower pays so that in the event of default the bank gets its money from the insurance policy as well as foreclosing on the borrower. Typically average PMI can be $50 to $80 per month on a median priced home of $159,000, according to the Mortgage Insurance Companies of America. But it can get up to $150 per month or more and is something to figure into your calculations especially if you are a first time buyer or are not putting a large down payment on the house. And then there are property taxes, of course, as well as homeowners insurance premiums to be added into the equation as well.
Overall a decent estimate to use in order to figure out how much house you can afford is that you can probably qualify to purchase housing that runs about two-and-one-half times your annual salary, however, this can vary wildly, depending on your current debt situation.
But you'll do better to use one of interactive calculators available on the web to get a better idea on how your income, debts, and expenses affect what you can qualify for. In fact you can try an online calculator that I wrote myself:
It is an interactive calculator so you can quickly see the affects of modifying things like other debt payments or plug in different interest rates. Its a little more sophisticated than this article goes into but basically I am using the 0.28 and 0.33 window to calculate the monthly payment that a conservative and aggressive bank would usually accept as a maximum mortgage amount. Then from that I amortize it and generate the total maximum home price that this formula predicts generally would be a highest acceptable amount that a lender might approve depending the other circumstances such as employment history and so on.
About The Author
James Iaccobucci is a seasoned mortgage veteran with over 8 years in the field as well as a burgeoning computer programmer. I invite you try out my mortgage loan affordability calculator at:
