How Much Mortgage Can My Family Afford?
Buying a home is an exciting life event and milestone. For many, it's a lifelong goal and a big part of accomplishing the American dream. On the flip side, however, it's also easy to get in over your head with homeownership by taking on a larger monthly mortgage payment than your family's budget can reasonably accommodate.
To avoid such a stressful scenario, it's important to determine how much mortgage you can really handle. And it's best to do so long before kicking off home shopping and getting your heart set on a property that's beyond your budget.
Need a bit of help determining how much mortgage your family can afford? Here are some of the ways experts suggest you tackle this critical question.
Apply the 28/36 rule
The 28/36 rule is a helpful formula that experts often suggest using to determine how much of a mortgage payment your monthly budget can comfortably cover.
According to this measure, housing costs (which encompass your mortgage, property taxes, home insurance, and HOA fees) should not exceed more than 28 percent of your household's monthly net income and 36 percent of your total debt.
- Related: The Family Home-Buying Guide
"By starting with this guideline, you can make conscious decisions about how much you can afford in housing costs every month and make sure you don't stretch your family too thin by taking on more than you're comfortable handling," Brittney Castro, a CFP with the budget planning and tracking platform Mint, tells Parents.
If the mortgage you're considering exceeds the 28 percent threshold, you may need to do some more work in your financial life, such as increasing your household income or reducing your monthly expenses, in order to be ready for a mortgage, adds Castro.
"Target a total mortgage payment that's equal to 25 percent of your gross monthly income," Jeanette tells Parents. "Although guidelines allow for a much higher debt to income ratio, staying at or below 25 percent means you will have the extra disposable income for other things. You will have the ability to start saving money, or investing."
Use a mortgage calculator
Another popular way prospective homebuyers determine how much mortgage they can afford is by using a mortgage calculator. There are plenty of these types of calculators available online including one from mortgagecalculator.org.
Mortgage calculators factor in such costs a home's sale price, homeowners' insurance, HOA fees, loan terms (the length of the mortgage), interest rate, and down payment, in order to provide an estimate of your approximate monthly mortgage payment.
"Online calculators will give a potential homebuyer an idea on the principal and interest payment," Ray Rodriguez, regional sales manager in Metro New York for TD Bank, tells Parents. "They may also help determine a down payment. They can be useful, but [online calculators] do not address other costs—such as taxes and insurance."
You can take your investigations one step further by going through the process of getting pre-approved for a mortgage, which is another helpful way to gauge the amount of mortgage you may be able handle based on your family's unique financial picture.
In order to obtain pre-approval, applicants must provide a lender with information about all income sources and expenses. The lender reviews this information along with your debt-to-income ratio and credit profile and provides you with a ballpark home shopping budget.
As Investopedia explains, a mortgage pre-approval is essentially a physical exam for your finances. "Lenders will likely poke and prod into all corners of your financial life as a way of trying to ensure you'll repay your mortgage," states Investopedia.
Going through the pre-approval process also allows you to identify and trouble spots in your finances and address them. This could include such things as your monthly debt payments being too high to reasonably afford a mortgage or your credit score not being what it should be in order to get a competitive interest rate on your mortgage.
Take pre-qualification with a grain of salt
Yes, we did just say getting pre-approved can be a helpful step in determining how much mortgage you may be able to afford. But don't buy into the pre-approval mortgage figure hook, line, and sinker.
"Banks will give you the highest loan amount possible since the higher the amount that you borrow, the more interest they can earn from you," Kris Lippi, a licensed real estate broker, member of the Forbes Real Estate Council, and owner of the real estate website I Sold My House, tells Parents. "Always remember that a bank is a business, and they will always aim to maximize their profits. So don't get too excited when you get approved for a million-dollar home. In this case, the saying 'Just because you can doesn't mean you should' applies. The bank will take into account your mortgage payment ratio and debt-to-income ratio, but they leave out your monthly living expenses and your spending habits."
Carefully review your monthly budget
Of course, one of the most straightforward ways to get a handle on how much mortgage your family's budget can comfortably cover is to simply sit down and carefully review your current income and expenses.
"Now is the perfect time to understand your spending," says Lippi, of I Sold My House. "This involves listing all your sources of income and getting the total amount. You need to categorize your spending into fixed expenses (this is the essentials such as a mortgage, utilities, car payments) and discretionary expenses (everything not included in your fixed payments). Don't forget to include setting aside money for retirement and savings as well in your calculations."
By identifying your household's average spending amount for the past three months, you should be able to determine what your general monthly spending pattern is and how much of a mortgage payment you can accommodate.
Consider what you're paying for rent
A less scientific way to get a sense of how much mortgage you can afford, or rather what you are most comfortable with, is to look at what you're paying for rent, Heather McRae, senior loan officer for Chicago-based CFS Mortgage, tells Parents.
"Are you paying $2,000 per month? How does that monthly amount feel?" says McRae. "Does it feel too high? Would you prefer it be lower? It doesn't matter if you can qualify for a million-dollar home if you don't want the hefty monthly payment that comes along with it."
Acquiring real estate is a great way to build wealth overtime, however it's important to be smart in order to ensure you're able to keep the real estate for the long haul.
"You don't want to have one of those stories where you get into a home too quickly without proper planning only to foreclose on the home down the road due to inability to pay for the mortgage," says Castro. "To prevent this from happening, review your current budget and determine how much home you can afford given your family's cash flow. It's important not to stretch yourselves too thin, and to leave enough wiggle room in your budget to save for other goals like a cash cushion, retirement, and your children's education."