According to the latest data from Trulia, the median selling price for a home is $192,000. That’s far more than most of us could afford to pay in cash, and why most of us take out a mortgage. But don’t rely on a lender to tell you how much of your monthly income you can comfortably spend on your home. They may let you borrow the maximum possible amount, but that doesn’t mean you should — or must — take them up on the offer. Crunch your own numbers first to determine how much money you can put toward your mortgage each month before you start searching for homes for sale in Alexandria, VA, or Boston, MA.
1. Calculate your true monthly cost
If you want an in-depth look at your potential mortgage payment, look for a mortgage calculator that includes costs like homeowners insurance or property taxes. (You want more than just a sales price and loan interest rate.) To figure this out, head to Trulia’s mortgage calculator and click “advanced.” Homeowners insurance and property taxes will be part of the mortgage costs you pay each month. You may also need to add in PMI, or private mortgage insurance, if you put less than 10% down on the purchase.
Your monthly insurance premiums and your property taxes will depend on what you buy and where you live. When determining how much of your monthly income you can spend on a mortgage payment, you need to add in both these costs. To get an accurate estimate, call insurance providers for a quote and look up property tax rates in the city or county you plan to buy in.
2. Know the legal limits on lenders
According to the Mortgage Reform and Anti-Predatory Lending Act, a section of the Dodd-Frank Act of 2010, any entity lending money for a mortgage cannot underwrite the loan unless they determine you can reasonably repay it. That determination is based on your credit, job history (and stability), and your income. By law, lenders can’t approve mortgages that would take up more than 35% of your monthly income. And most lenders stick with even more stringent requirements, limiting a mortgage payment to 28% of a borrower’s monthly income
3. Your mortgage should take up no more than 28% of your monthly income
You can use 28% as your rule of thumb too when making a budget for buying a home. Here’s an easy formula: Multiply your monthly income by 28, then divide that by 100. The answer is 28% of your monthly income. The median income in the U.S. is $55,775. If this were your income, you’d make about $4,648 per month; 28% of that monthly income comes out to about $1,301.