So if you are a first time homebuyer you may find yourself thinking “How much home can I afford?”

DEBT TO INCOME RATIO

The first thing to do is add up all your monthly income before taxes.  A $60,000 year salary would equal $5000/month.  Next you add up the minimum payments on all debt that is on your credit report.  This would include car payments, credit cards, revolving loans, student loan payments but not money you have borrowed from a family or friend.  If you would prefer to be conservative, then instead of minimum payments you can use a higher payment amount.  So back to our example: Let’s say you have a car payment of $250, a credit card payment of $100 and student loan of $100.  This would give you a total monthly debt of $450.  Subtract this from your income and then multiply by 40% (the responsible amount of income as seen by lenders to be spent on housing).  

$5000 – $450 = $4550 x 40% = $1820

This is why many lenders will encourage you to pay down your debt before applying for a loan.  Let’s say you were able to pay off the credit card and car payment then your allowable mortgage payment would now look like:

$5000 – $100 = $4900 x 40% = $1960

We will get into the other monthly mortgage costs in Part 2, but to give you an idea of what you can afford, here is a fairly typical break down:

$400,000 house price

$80,000 20% down payment

4.25% interest rate

30 year loan term

$1,574        monthly mortgage payment

$150           monthly taxes

$100           monthly homeowners insurance       

$1,824        total monthly payment

Check out this great mortgage calculator using todays interest rates.