Buying a house is a huge financial commitment. You want to make sure you can afford the monthly mortgage payments for the next 30 years and your mortgage lender wants to make sure you can afford them, too. That's why the lender has financial guidelines it looks out when considering whether you are eligible for a mortgage. You can use those guidelines and judge yourself whether you can afford the home of your dreams.
Consider All Costs
Knowing the maximum value of a home you can get approved for a mortgage for is just one of the costs you need to consider before you buy a home. That's why your mortgage lender looks at two ratios when deciding how much house you can afford. One ratio looks at monthly payment, but the second looks at your monthly payment and your other debt from things like credit cards, car loans, student loans and child support. You will need to be below the threshold for at least one of these numbers to get approved for a mortgage with a monthly payment of $2,500.
You mortgage lender will want your monthly mortgage payment to be no more than 28 percent of your gross monthly income. If the payment exceeds 28 percent, then you might still be approved if your total long-term debt is below 36 percent of your gross monthly income. The figures are what have been found to be affordable amounts, while still leaving room for monthly living expenses and disposable income.
Doing the Math
If you know your monthly mortgage payment is project to be $2,500 a month, then you need to divide that by .28 to get the minimum gross monthly income you need to make to afford the payment, which is $8,928. This equates to earning $107,136 a year before taxes. However, at this annual income, you will need to make sure that your other long-term debt does not exceed $714 a month. This is because $8,928 times .36 is $3,214 a month. If you subtract the $2,500 from that amount, you are left with amount of other allowable long-term debt.
Lowering Your Numbers
If your income is not great enough to support a mortgage for the home you want, then you can either find a way to pay off some of your long-term debt or make a larger down payment on the house. Doing the latter will make your monthly mortgage payment smaller, and this, in turn, will lower the financial ratios the mortgage lenders consider.
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