What Can You Afford?

Your monthly income is a major factor to the amount that your bank or mortgage company will lend you. In general, lenders will look at the mortgage-to-income ratio of no more than approximately 30%. This means that if you have a monthly gross (pre-tax) income of $5,000 per month, then the lender can expect that you can reasonably pay as much as $1,500 per month in mortgage payments.

It is important that you assess how much you can afford in monthly mortgage payments realistically. Make sure that you include home related expenses such as real estate taxes, homeowners' insurance, and money for home repairs. Try not to over extend when working out how much home you can buy, and never buy the most expensive home you can afford.

Your debt-to-income ratio will also affect the amount you can borrow. This is the percentage of your monthly income that is committed to repaying other outstanding debt such as student loans, car loans and credit card debt. If your gross income per month is $5,000 and you are paying $1,000 in debt per month, then, your debt-to-income ratio is 20%. Obviously the lower this figure, the better your finances will look to prospective lenders and the more you will be able to borrow on your home mortgage loan. In general, mortgage lenders are not happy arranging loans with anyone who has a ratio of more than 40%. If you think your debt to income ratio is too high, it may be a good idea to clear some of your outstanding debt before attempting to qualify for a mortgage. Paying off outstanding personal loans or credit card balances will increase your credit score and enable you to borrow more to buy a home.

Making a 20% down payment on your home will not only lower your monthly mortgage payments, but it will also mean you will not need to pay expensive private mortgage insurance in addition to your mortgage payments. Private mortgage insurance is designed to protect the lender if you default on the loan.

In addition to a down payment, you will also need to budget for costs such as: