If you are a first time home-buyer dipping your toes in the waters of home mortgages, it can sometimes feel like you’re drowning in information. You’ll probably find yourself turning to the internet to Google: How much mortgage can I afford? This will give you many links to online calculators, each with different estimates of what you can afford. While these mortgage calculators can be useful, they can’t give you a true estimate of your financial picture the way a lender can.
The 28/36 Rule
These calculators all base their formula on a rule that mortgage lenders use called the 28/36 rule. This rule determines a safe lending amount using the logic that a household should spend no more than 28% of monthly gross income on housing, with a maximum of 36% on total debt.
For a family making $50,000 a year, 28% of that gross income would equal $1166 total for housing expenses, which includes mortgage insurance, home insurance, property taxes and other expenses. That leaves $333 for other debt, such as car or student interest loans. If your debt is higher than $333 a month, this means your house payment needs to be lower than $1166.
What Calculators Miss
These calculators usually take three factors into account: income, down payment, and debt. Because each household is different, this basic formula isn’t reliable for individuals. You may have more doctor visits than most, or daycare expenses, or choose to invest a high percentage for the future, or enjoy eating out every weekend. While this may not be considered debt, these expenses should all be taken into account when deciding what you can afford.
Another factor sometimes missed by these calculators are the mortgage insurance, home insurance, property taxes and other expenses mentioned above. These expenses can sometimes amount to hundreds of dollars a month, meaning that a seemingly affordable $1100 payment may actually be closer to $1500.
Other contributing factors calculators don’t ask about could be what you intend to use the property for, what type of property it is, your credit score, and any bankruptcies or collections in your past.
The best way to learn what you can really afford is to talk to a professional, like one of our trusted loan originators. They can look at all the contributing factors for your personal circumstances and help you decide the best path forward. If you’re looking for a new home and want a true picture of what your numbers should look like, contact me today.