You should only get a mortgage you can afford. Lenders don’t hand out mortgages like candy the way they did in the early 2000s, but some lenders can still approve you for more house than you should get. If you don’t want to wind up as another foreclosure fatality, know how much you can manage before you take further steps on your mortgage search.
Calculate 28 Percent
Visit your bank or credit union to determine how much of a loan you can get. Consider that figure, and then do your own calculations, too. Your mortgage payment should not be more than 28 percent of your gross annual income. For example, if you and your partner’s combined annual pretax income is $100,000, you figure that 28 percent of 100,000 is 28,000. Divide that by 12 to determine that you should not pay more than $2,333 per month for your mortgage. But that’s not all. You have more costs associated with a mortgage than the mortgage itself. Include homeowners insurance fees, private mortgage insurance that you pay if you put less than 20 percent down on your mortgage and until your home equity is 20 percent, property taxes and, in some cases, association fees. These fees, combined with your mortgage, should not be more than 32 percent of your gross annual income, or $2,667, using the $100,000 example.
Your Other Debts
Because your mortgage payments and related fees are probably not your only debt, do another calculation, one that includes all your debts such as car loans, credit cards and any other loans you pay monthly. All your debts combined should not exceed 40 percent of your gross income. Using the previous example, you can pay the maximum mortgage payment of $2,667 if the rest of your debt is less than $666. Otherwise, you need to spend less on your mortgage payments or pay off some of your debt.
One Income or Two
Before you go house hunting, think about the future. If you are using your income and your partner’s income to determine how much house you can afford, do another set of calculations using just one income. One of you may lose your job or decide to quit to raise a family, so you might want to get a mortgage based on one income instead of two. If you have an expensive hobby that you are not willing to give up, figure that cost in with your debt calculations. You might not want to give up your lifestyle to a mortgage.
Staying in the House
If the economy is sputtering and you don’t plan to stay in your house for at least three years, it probably doesn’t make sense to buy a house, according to CNN Money. Closing costs you pay when you buy a home, which are typically 3 percent to 5 percent of the home’s value, combined with a down payment and a shaky housing market, make the likelihood of your losing money too great. Continue renting until you are sure you can stay in your house longer than three years.
Laura Agadoni has been writing professionally since 1983. Her feature stories on area businesses, human interest and health and fitness appear in her local newspaper. She has also written and edited for a grassroots outreach effort and has been published in "Clean Eating" magazine and in "Dimensions" magazine, a CUNA Mutual publication. Agadoni has a Bachelor of Arts in communications from California State University-Fullerton.