Determining How Much You Can Afford

by Brian Bagnall

Before you go shopping for a home, you need to know the amount you can afford to pay for a home loan. It would be a disappointment to find the home of your dreams only to discover that the home loan is out of your price range. Once you decide to enter the market for a new home, take some time to determine just how much you can afford to pay for a new home loan.

The amount you can afford to pay for a home loan will largely depend on your annual gross income. The rule of thumb most often used is that you can purchase a home that is one and a half times your gross annual income. This means that if you make $50,000 a year, then you can afford a $125,000 home.

There are many calculators on the internet that will help you determine how much you can afford to pay for a home loan. These calculators consider all sources of income including wages, alimony, interest, and dividends. Your monthly expenses are also considered – car payment, alimony payments, credit card payments, and other debts. Note that monthly rent is not used as a factor to determine the amount you can afford to pay for a home. Finally, the financial information about your new home loan is taken into account. This is the down payment, loan term, interest rate, homeowner’s insurance, and property taxes. Using all this information the calculator will let you know how much you can afford to pay for a home loan.

You can find such calculators by using an internet search engine. Each of the calculators may differ slightly in the information that is requested. Nevertheless, most calculators will consider income, debt, and loan information.

You may run into a situation where the calculation resulted in a smaller number than you would have liked. So, how can you afford a more expensive home loan? There are three main ways that you can do this.
1. Increase your gross annual income. If you’re due for a raise, it might be time to have a talk with your boss.
2. Decrease your monthly debt. Lowering your total debt load will certainly make a more expensive home a little more attainable.
3. Increase your down payment. Increasing your down payment subsequently increases the amount you can afford to pay for a home by that same amount.

Consider also your lifestyle and plans for the future as you estimate what you can afford to pay for a home. Just because the bank will give you a home loan for $200,000 doesn’t mean you can necessarily afford a mortgage payment on that amount. Do you have kids or plan to have them in the future? What about future automobile and other large purchases? These, too, play a part in what you can afford to pay for a home.

Getting pre-approved for a home loan will give you a more tangible idea of the amount you can afford to pay for a loan. If you’re not yet ready to take that step, calculating the amount on your home, will do just fine.