Many first-time home buyers ask these questions:
How much house can I afford?
What mortgage can I afford?
What mortgage can I get approved?
How Much House Can I Afford?
What Mortgage Can I Afford?
Determining “how much can I afford?” may seem difficult, but there are some simple tricks to help you determine the answers. The best one is known as the 28/36 rule. This is an established benchmark to help you determine mortgage affordability that is used by lenders.
The “28” of Mortgage Affordability
When determining “How much house can I afford,” you will want to look at your total housing expenses in relation to your income. This is the “28” portion of the equation.
The “28” refers to having no more than 28% of your gross monthly household income going toward housing costs. These include:
- Mortgage principal
- Interest
- Taxes
- Insurance
To calculate, simply multiply your gross monthly income, which is the amount before taxes, by 0.28. The resulting number answers the question, “How much can I afford?”
Example of Mortgage Affordability
Let’s say you earn an annual salary of $70,000. Here is how you can determine “What mortgage can I afford?”
- Divide $70,000 by 12, giving you a monthly gross income of $5833.
- Multiply that by 0.28
The answer, $1,633, is the highest amount you should spend on total housing costs each month.
The “36” of Mortgage Affordability
The “36” part of the 28/36 rule refers to your overall debt. This should not exceed 36% of your income. This is very important for determining the answer to the question, “How much mortgage can I get approved?” Not only do high monthly debt loads impact the amount you can afford to spend on housing, but it also affects how much a bank will lend.
