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If there’s one thing first-time home buyers are always asking their mortgage broker, it’s this: “How much house can we afford?”
And while, in theory, it would be great if the question could be answered with a few simple numbers and equations, the actual answer is a little more complicated. So, how can you calculate how much house you can afford?
As a general rule, approximately 35 percent of your total income should go to paying off your debts. Of that percentage, no more than 28 percent of your income should go to your mortgage, leaving 7 percent to pay off things like credit card bills and student loans.
For example, if you make $100,000 a year before taxes, $35,000 per year should go toward all your debts, including your mortgage payment. Of that number, $9,800 should go toward your mortgage. This breaks down to about $820 per month.
Many websites offer an online mortgage calculator that also determines how much house you can afford. These sites ask a number of questions to determine affordability, including:
1. Where is the house you’re looking to buy? Many mortgage calculators ask for the zip code where the house is located. This helps them take things like taxes (both state and local) and insurance, such as homeowner’s insurance, flood insurance and hurricane insurance, into account.
2. How much do you make before taxes? Another thing the mortgage calculator asks you for is your annual income before taxes. If you’re buying the house on your own, only your income is taken into account. If you’re buying the house with your spouse or another family member, both incomes are used in the calculation.
3. How much are you putting down? Typically, mortgage brokers recommend you have at least 20 percent of the total home purchase price as a down payment. However, the actual amount you put down may vary based on a number of factors. If you get an FHA loan, the required down payment is much less than 20 percent.