Qualifying for a Mortgage
Here's the formula bank lenders use to determine how much mortgage you can afford.
Don't start house hunting until you seriously consider how much you can afford to pay. A little advance planning will save you time and money later, because you won't bid on unattainable houses or apply for loans that are out of your ballpark.
How Much House Can You Afford?
You may hear an old formula that says you can afford a house worth about three times your total (gross) annual income. Don't rely on this formula, however -- it's much safer to look at your own budget, figuring out how much you have to spare, and what the monthly payments on your new house will be (not just the mortgage -- factor in taxes, insurance, maintenance, and more).
Lenders have traditionally wanted you to make all monthly payments using no more than 28% to 44% of your monthly income. In other words, if your monthly income is $2,000, the lender would want you to pay no more than $880 (.44 x $2,000) toward all your debts.
These traditions are, however, becoming less rigid -- now, if you have an excellent credit record, a lender might allow you to go more deeply into debt. But you'll need to use your own common sense, and make sure you leave yourself some money with which to buy furniture, cope with a job layoff, or simply enjoy life.
For a sneak peak at how much of a mortgage you'll be able to qualify for, see Nolo's calculator on qualifying for mortgages.
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