how much house can you afford?

Generally, there are two rules of thumb to follow to determine how much house you can afford: ·

• You can buy a house that costs up to 2 1/2 times your annual gross income. ·
  
  
• Housing should cost about 1/4 of your gross pay or 1/3 of your take-home pay.

When you buy a house, there will be up-front costs and mortgage payments. Your buying power will depend on how much money you have available now to put down on a house and on how much a creditor agrees to lend you.

the down payment - how much is enough?
Coming up with the cash for a down payment is usually the hardest part of buying a home, especially when it's your first. Depending on your loan, you may be able to make a down payment of as little as 3-5 percent of the purchase price. The downside to this, however, is that you will end up paying much more in interest and will also have to purchase private mortgage insurance, which protects the lender's investment in case you fail to make your payments.

Obviously, the larger your down payment, the lower the cost of your mortgage (and, ultimately, the house). The amount of your down payment will be determined by several factors: ·

• Closing costs. These usually total between 3 and 6 percent of the amount of your loan, and include points, insurance, various fees and inspections. If you are lucky, the seller may agree to share some of these costs with you. ·

• Savings. Your lender may want to see that you have at least two months of mortgage payments in savings when you apply for your loan. ·

• Miscellaneous Costs. Moving into your new home will bring other up-front costs, as well, such as the cost of moving, any repairs that the house might need, and any furnishing you plan to do.

the mortgage - how much can you borrow?
The other factor will be how much you can afford in monthly payments on a mortgage, which will often depend on how much a bank will loan you. Your lender will consider both your income and your existing debt in determining how much mortgage debt you can afford.

Two ratios serve as guidelines for lenders in evaluating your mortgage application: ·

• Housing expense ratio. Your monthly housing costs (including property taxes and insurance, as well as mortgage payments) cannot exceed 28 percent of your monthly gross income. ·

• Debt-to-income ratio. Your total long-term debt (including housing costs, car loans, student loans, alimony or child support, and balances on credit cards that will take longer than 10 months to pay off) should not exceed 36 percent of your monthly gross income.

Lenders feel that these guidelines will keep household debt manageable. However, they are somewhat flexible. If you make a large down payment, or if you have consistently made rental payments close to the amount of your proposed mortgage payments, you may be able to exceed these guidelines. And some lenders allow low- and moderate-income buyers to use 33 percent of their gross monthly income for housing and 38 percent for total debt.

Use our calculator to evaluate your situation and determine how much you can afford to pay for a house. Just remember that because some formula determines that you can afford a certain mortgage doesn't mean you will necessarily feel comfortable making the payments. Keep track of what you spend for a few months in order to better understand what lifestyle you can comfortably afford.

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