How Much Mortgage Can You Actually Afford?

It’s the stereotypical American dream — graduate from school, get a job, buy a house and start a family. For most people, buying a house involves taking out a mortgage, another term for borrowing money from the bank. This money is then paid back in monthly installments, similar to the rent you’ve probably already been paying for most of your adult life. If you’re looking into buying a house, you need to take a hard look at your finances. How much mortgage can you actually afford?

How Much House Do I Need?

First, ask yourself this — how much house do I need?  If you’re a single person or a part of a young couple just starting out, you might think you only need a small one- or two-bedroom house. What happens if you buy small and then later decide to have children? Will you have the funds to expand your house or will you need to sell and buy a bigger house?

This might seem like we’re asking you to see the future, but it’s cheaper in the long run to buy more space than you need now. Adding a full room to an existing structure is possible, but it can cost nearly as much as buying a new house.

What Does My Income Look Like?

Income is the second part of this question — what does your income look like? Are you working in a stable career that’s likely to provide you with a steady income for the term of your mortgage? Steady employment is one of the things that will determine whether or not you qualify for a mortgage. A new job or a job history that shows a lot of career changes or gaps in employment can look bad on your mortgage application and cause the bank to deny it.

Take a good, hard look at your income and job history. If you’re worried about your resume and are planning to try to buy a home soon, make an appointment with a mortgage professional to see what your options are.

How Much Mortgage Can I Afford?

So, how much mortgage can you afford?

The general rule of thumb is that your mortgage shouldn’t exceed more than 36 percent of your income. Mortgage bankers might try to convince you that you can afford a larger mortgage based on your income, but you have to look at the monthly payments. Can you afford your other bills, groceries and entertainment if your mortgage payment is eating up 50 percent of your monthly income every month?

Many financial planners recommend a debt-to-income ratio of 43 percent. This includes all your debts — student loans, credit cards and car payments — in addition to your potential mortgage. You may still be able to get a loan from a large bank or company if your ratio is higher than this percentage, but you will likely be denied by smaller lenders.

Keep in mind, too, that unlike a rental property, you will be responsible for the cost of all repairs and maintenance. Do you have enough money squirreled away to re-shingle the roof or replace a large appliance if it breaks?

While buying a home might not be the biggest part of the American dream anymore, it’s still a major  milestone. If you’re looking into purchasing a home, make sure you figure out how much mortgage you can really afford before you make an appointment with the banker or mortgage services provider. Don’t let them convince you to take a mortgage you won’t be able to afford in the long run.