Calculating How Big a Mortgage You Can Afford

Determining how big a mortgage you can afford is a huge part of the home buying process. You want to be sure you are not overextending yourself, and you need to be able to look at homes that you know you can qualify for. There are a few factors that are considered when calculating how much of a mortgage you can afford.

Salary

You should aim to keep your mortgage payment under 30 percent of your take-home salary. This is a healthy number that will ensure you can afford your mortgage and other living expenses.

Debt-to-Income Ratio

Your DTI ratio is a fraction that shows your monthly debts (credit cards, car payment, student loans) in relation to your salary. Most lenders want your DTI, including your proposed new mortgage payment, to be under 45 percent of your income. So, if you have no other debts, you can afford a higher mortgage than someone who has many other obligations.

Interest Rate

Your interest rate will make a big difference in how much you can afford. The higher the rate, the higher the house payment. When you pre-qualify for a mortgage, your loan officer tells you what rate you qualify for and then what your mortgage payment would be on differently priced homes.

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