How Much Mortgage Loan Can You Really Afford?

So you want to buy your first new house. But how much of a mortgage loan can you really afford? This affordability question is one of the most crucial questions you must ask yourself; if you want to have a successful mortgage deal where you can afford the monthly payments and avoid any chances of foreclosure or your home being taken away from you.

All this depends on your annual income versus your annual costs. If you keep your mortgage loan in line with your annual income, you should have no trouble writing that check every month; or else you will dread every check you write.

i) Housing Costs

Your mortgage loan costs including the pricipal owing balance, interest, taxes, closing costs + home improvement fees should not exceed 28% of your annual gross income. By gross income, we mean the income you earn before income taxes are deducted.

ii) Debt Obligations

Your other debts including any student loan payments, credit card debt, auto loans, child support payments etc should not exceed 36% of your annual gross income. Want to see how you fair? Select our 28/36 mortgage calculator to determine how much of a monthly mortgage payment you can really afford.

For example, consider you and your spouse make $75,000 a year gross income (before taxes). This enables you to have housing costs of up to $1750 per month. This is how we derived this number:

$75,000 annual income / 12 months = $6250 per month
$6250 per month * 28% = $1750 per month

This amount also includes property taxes, condo/townhouse fees, etc.

You must also hold all your debt payments to less than $2250 per month. This amount is derived by:

$6250 per month * 36% = $2250 / month.

One of the biggest mistakes that all borrowers do is borrow beyond their limits, and take out too much debt. Real estators and loan officers also like to entice consumers with stylish more expensive homes than they can really afford to purchase, obviously because they get a bigger cut of the house you purchase.

Here's a piece of advice. Do not let your lender tell you how much of a mortgage loan you can afford to take out. Because this is NOT really what you can afford, it is inflated. Do your own Math, use our mortgage calculators to determine your affordability.

For example, many people will think whatever their lender says they can borrow, means that is the amount they can afford. If your lender shows you a $750,000 house while your income is less than $100,000 a year, obviously he's not on your side, he's out to rip you off!!

Eric Tyson, author of the book "Mortgages for Dummies" says many people fail to look at their current spending budget and how that will change with the new house they will be purchasing.

There is also the emotional effect many consumers feel when purchasing a home. They get so emotionally attached to the property their real estate agent is showing them that they will do whatever it takes to get it; even if that means taking out a mortgage loan beyond their limits.

Tyson adds, "The home becomes a status symbol. They just have to live in that neighborhood because once they are there, their lives will be perfect."