How to Calculate an Affordable Mortgage

Have you ever wondered how big of a house you can afford? Well this set of step-by-step instructions will help you figure out how much you can afford to dish out for that house you've been dreaming of.

Difficulty: Moderately Easy

Instructions

Things You'll Need:

• Pen or pencil and a piece of paper
• An idea of current interest rates
• An idea of your non-mortgage expenses

1. First, you'll need to grab your pen or pencil and a piece of paper and write down your annual gross income next to the number 1.

2. Divide your annual gross income by 12 to calculate your monthly gross income. Write this down beside the number 2.

3. Skip a couple of lines and write in big bold letters "Housing Expense Test".

4. Just below the title "Housing Expense Test" write your housing expense-to-income ratio next to the number 3. This is the percentage of your income you are planning to spend on your mortgage. I used 28% in my examples. See the warning at the bottom of the page before continuing.

5. Multiply line 2 by line 3 and write the value beside the number 4. This is your allowable housing expenditure.

6. On the next line, beside the number 5, write the value of your estimated non-mortgage housing payments. These will include mortgage insurance premiums, property insurance, real estate taxes, etc.

7. 
    
   Figure 1

   Subtract line 5 from line 4 to calculate your affordable monthly mortgage payment under the housing expense test. Write this beside the number 6. Refer to Figure 1 to see how this and the previous steps should look up to this point.

8. Skip a couple of lines and write in big bold letters "Debt Repayment Test".

9. Just below the title "Debt Repayment Test" write your debt repayment-to-income ratio beside the number 7. This is the percentage of your total monthly debt payments including housing expenses. I used 36% in my examples. See the warning at the bottom of the page before continuing.

10. Multiply line 2 by line 7 to calculate your allowable debt payment. Write this value beside the number 8.

11. Write your monthly installment debt and alimony next to the number 9. Include all installment debt with more than 10 payments remaining, in addition to any other regular claims on your income.

12. Add lines 5 and 9 together to calculate your total non-mortgage expense and installment debt repayment. Write this value beside the number 10.

13. 
     
    Figure 2

    Subtract line 10 from line 8 to calculate your affordable monthly mortgage payment under the debt repayment test. Write this value beside the number 11. Refer to Figure 2 to see how this and the previous steps should look up to this point.

14. Skip a couple of lines and write in big bold letters "Your Affordable Home Purchase".

15. Just below the title "Your Affordable Home Purchase" write the value of line 11 or line 6 (whichever one is less) beside the number 12. This is your affordable monthly mortgage.

16. 
     
    Figure 3

    Refer to the table in Figure 3 to determine your monthly payment per $1,000 mortgage. Write this value beside the number 13.

17. Divide line 12 by line 13 and multiply by $1,000. Write this value by the number 14. This is your affordable mortgage.

18. Beside the number 15, write down the fractional amount borrowed. This is the percentage of the cost left over after your down payment. If you plan to put 20% down, for example, the fractional amount borrowed would be 80%.

19. 
     
    Figure 4

    Divide line 14 by line 15 and write the value beside the number 16. This is finally your affordable home purchase. See Figure 4 for an example of the completed version of this worksheet.

Tips & Warnings

• The Federal Home Loan Mortgage Corporation recommends that your monthly housing expenses (determined in step 2) not exceed 28% of gross monthly income. It also suggests that your total monthly debt payments (determined in step) not exceed 36% of your gross monthly income.