How Much Can I Afford?

Calculating The Maximum Mortgage Which Is Affordable

Prospective homeowners who are just starting to look at homes often ask, “How much can I afford?” A simple answer to this question would be that the payments for a mortgage shouldn’t put the current way of life of the future homeowners at risk.

Mortgage lenders have found mathematical formulas to find a number fitting to this simple answer. These formulas result in specific guidelines regarding the maximum amount of money they are willing to lend purchasers of properties. The amount is based on factors such as:

  1. annual income
  2. credit scores
  3. current consumer debt load

Mortgage And Debt Rates Below 38% Of The Income

Mortgage lenders calculate a potential homeowner’s total monthly income and compare it to the proposed mortgage cost and other monthly debts. The ratio of monthly expenses due to mortgage and consuming debt should be no greater than 38 percent of the homeowner’s income.

In other words, the lenders accept rates for consumer debts upto 5 percent and mortgage debts upto 33 percent of the income.

The Costs Of A Mortgage: PITI

When calculating the maximum affordable mortgage you will eventually notice the term “PITI”. The term is an abbreviation for the typical costs of a mortgage:

  1. Principal
  2. Interest
  3. Property taxes
  4. Insurances

PITI Below 33% Of The Income

By deducting the monthly payments for consumer debt, the homeowner can see what the maximum monthly payment the lender will allow for the mortgage and expenses related to home ownership. In general, lenders will allow the ratio of mortgage and related expenses PITI to be no greater than 33 percent of the total monthly income.

Changing Income And Interest Rates

The prudent homeowners to be will think of a common pitfall. The costs of life can change as well as the net income or the mortgage rates. What is affordable today can be too much in a year. It is therefore wise to accept a credit line below the maximum possible amount to keep some flexibility to react to future changes.