Besides your monthly mortgage payments, there are many other factors in when figuring out what you can afford, or even if you can afford to buy a home at all. This includes the down payment for the loan, closing costs, moving expenses, plus additional purchases and maintenance for the new home. Generally, your annual gross income multiplied by 2.5 will give you an approximate amount for the price of home you can afford. Of course, this can vary depending on how much you have as a down payment, your debts, financial situation, and credit score. Your debts should not be more than 30 to 40% of your gross income. A mortgage caluculator can help further with this.
Monthly Mortgage Payment
Lenders want to make you are solid enough financially to be able to pay the loan over time. As a general rule of thumb, you can figure that your monthly mortgage payment should be less than 30% of your gross monthly income. This also will vary depending on individual circumstances.
Amount of Money Needed
You will need money for a down payment and closing costs, plus any move related expenses and maintenance or repair costs for your home. This is normally at least 2% of the purchase price.
» Down Payment – Your down payment is a percentage of the property value and is usually from 3 to 20%, but can be more if you want a lower loan amount. This can vary by the type of mortgage you obtain (FHA, VA, Conventional, etc). Also, if your down payment is less than 20%, you may be required to pay mortgage insurance (PMI or MI).
» Closing Costs – these are settlement costs involved in purchasing your home. They range from 2 to 5% of the property value and include such things as points (a percentage paid for securing a particular interest rate), loan fees, taxes, title insurance, pre-paid and escrow items, and of course, your down payment. Your lender and escrow company can estimate these costs prior to closing.