When you are in the market for a new home how do you determine how much you can afford for a monthly mortgage payment? You may think that you can afford a certain payment, but once you add in all of the extra expenses that come with owning your own home, like home owner’s insurance, property taxes, utility bills, upkeep of the home, and more, you may rethink how much is affordable for your financial circumstances.
The Department of Housing and Urban Development has resources in place to help you determine how much you can afford for a monthly mortgage payment depending on your income. The Federal Housing Authority (FHA) figured out that with normal expenses, such as car payments, clothing, and more, a family can afford to spend about 29% of their income on their monthly mortgage payment. In this case, if you gross $30,000 per year that averages out to $2,500 per month. That means you could reasonably afford a $725 monthly mortgage payment because that is 29% of your monthly income. If you are able to get a 6% interest rate on your mortgage loan then you could afford a $120,000 house because you payment would be $719 per month. Now you would know what price range you could begin looking for a house in.
If a family has no debt at all then they can afford as much as 41% of their gross monthly income for their monthly mortgage payment, but there are some things to consider. For Instance:
- Do you have expensive hobbies? If your hobbies are expensive, like having a boat or taking frequent vacations, you should consider your comfortable lifestyle choices. You may choose to have a lower mortgage payment than you can afford so that you can spend more money on the things you enjoy to do as a pastime.
- Do you have a lot of debt? If you have high credit card balances and owe a lot of money in student loans you should consider these payments when you calculate how much you can afford a month for your mortgage payment.
- Even though you have no debt, do you really want to spend 41% of your monthly income on your house payment? You may want to consider a lower income percentage in case you decide to take on more debt in the future like a new car payment.
For more information on how much of a FHA mortgage payment you can afford and how to calculate what price of a home you can afford check out HUD’s Home Buying Guide (PDF File).