What you can afford vs what the mortgage company says you can afford.
What you feel you can afford
You should definitely have a grip on your own budget first; check out this resource page on budgeting.
You should also consider the following:
- Do you have to pay for utilities now? Itemize your current utility expense
- As you consider different houses, note the required utilities
– electricity
– heat source (propane gas, natural gas, oil, electric or other?)
– cable/satellite/internet
– water/sewer
– garbage collection
You may want to check to see what the cost of these utilities have been for a specific home for the past 12 months. Also, check to see what kind of deposits, if any, may be required to get utilities going. - What additional upfront expenses will you have? Will you need to purchase
– furniture, appliances,curtains, shades, blinds
– lawn mower and other equipment to maintain the yard? (rakes, shovels, garbage cans,weedwacker,etc) - What recurring expenses will you have?
– fertilizer, flowers, plants, trees
– snow plowing
– replacement of appliances, hot water heater
– plumbing/heating repairs
– replacement of roof in future
What the mortgage company says you can afford
Maximum Debt Ratios
Take your gross monthly income (before taxes) and multiply by 43% then subtract out all debt payments. The remaining difference may represent your maximum housing payment. Debt payments are defined as loan payments (student loans, personal loans, car loans, other loans), credit card minimum payments, car leases, payments on timeshares and mortgage payments.
Note: some programs like FHA may allow as much as 55% of your gross income to be allocated to debt and a housing payment (combined). Other programs allow up to 50% of your income to be allocated for debt and housing. Each borrower is unique and the maximum payment may be different from consumer to consumer and is often dictated by credit score, property type and automated underwriting findings.
Housing payments are often referred to as PITI.
PI = Principal & Interest (the actual payment required to repay the mortgage)
T = Taxes (take the annual taxes and divide by 12 to get the monthly tax allocation)
I = Insurance (take the annual insurance and divide by 12)
Note: There are 3 kinds of insurance you may be required to pay
Homeowner insurance (sometimes called hazard insurance). This is fire/theft/liability insurance on the house.
Mortgage insurance (sometimes called PMI). A monthly fee may be required if you put less than 20% down.
Flood insurance. If the home is in a flood zone you will be required to pay flood insurance.