How to Determine How Big a Mortgage You Can Afford

Before you look for that dream house, you need to ask yourself what you can really afford to spend each month. These calculations are based on a typical down payment of 20 percent.

Steps:

1. Collect some home guides or look at a few ads in the Sunday newspaper for houses you would consider buying. Look at the asking prices of a few selected homes and multiply these by 0.80 to give yourself a ballpark figure on the mortgage debt amount for those homes. (This assumes that you will be making a 20 percent down payment.)

2. Calculate what the mortgage payments for these homes would be. Use personal-finance software or an online mortgage calculator. To make a quick approximation of your monthly payments, see “eHow to Estimate Your Mortgage Payment.’

3. Add what you will have to pay monthly toward property taxes, insurance and private mortgage insurance (PMI).

4. Add to this number your monthly utility costs. (If you are renting and have no idea what utility costs are, ask friends and family what they pay. Or ask your real estate agent for typical figures.)

5. Add in your monthly budget for home maintenance. Budget about 1 percent of the cost of the home for maintenance each year. (If the house costs $150,000, budget $1,500 annually, or $125 per month.)

6. Add in the prorated monthly cost of any furnishings, landscaping and nonessential improvements to the house.

7. Compare this figure with your monthly net income to estimate affordability.

8. Multiply your monthly income by 0.40 (40 percent is a common measure). If that figure is equal to or greater than your estimated monthly cost figures, the house of your dreams may well be in your price range.

Tips:

If you have consumer debt (credit cards, personal loans), try to eliminate or reduce it since it will drag on your ability to qualify for a mortgage and make the monthly payment.

If you have monthly payments (car, credit cards, personal loans, etc.), be sure to take these into account when determining that bottom-line affordability figure.

Warnings:

Lenders can only tell you what you might be able to afford based on your salary and debt level. You also have to feel comfortable with the reality of the monthly payment.

Don¿t assume that you can cut back your expenses and stretch yourself into a house payment. You can only eat boxed macaroni and cheese so many times.