When buying a home, one of the most important first steps is understanding what mortgage amount you can qualify for. Determining your maximum monthly housing budget and home price range will allow you to look for home with confidence that you can comfortably manage your monthly finances.
Most banks and lending guidelines stipulate that not more than 45% of your gross monthly income can go towards total debt payments*. Using that guideline, we can then easily determine how much you can afford to spend for your housing costs.
4 steps to find out how much mortgage payment you can qualify for:
1. Determine your Gross Monthly Salary
Take your annual gross salary (pre-tax) and divide by 12. This answer is your Gross Monthly Salary.
2. Multiply your Gross Monthly Salary by 45%
Take your Gross Monthly Salary and multiply it by 0.45. This answer is you Maximum Monthly Debt Load.
3. Add up all your Current Monthly Debt
Add together all non-housing monthly debt (including car payment, student loan payment, credit card minimum payments, etc but not including rent) to determine your Current Monthly Debt.
4. Subtract your Current Monthly Debt from your Maximum Debt Load
Your Maximum Debt Load minus your Current Monthly Debt equals your Maximum Housing Payment. That tells you what you can afford for your monthly housing costs (made up of mortgage payment, taxes, and insurance, known as “PITI”, see below for more).
Monthly housing costs are made up of PITI, which stands for:
- P – Principal
- I – Interest
- T – Taxes
- I – Insurance
Note: For condos, you also need to add a “C” for condo association dues
A quick example:
1. If your annual salary is $75,000, then your Gross Monthly Salary would be $75,000 / 12 = $6,250
2. Using the 45% Rule, you have a Maximum Monthly Debt of $6,250 * .45 = $2,813
3. Let’s assume you have non-housing Long Term Monthly Debts (school loan plus car payment) that total $450
4. Subtract your Long Term Monthly Debt from the Maximum Debt Load $2,813 – $450 = $2,363 which is your Maximum Housing Payment.
*Depending on your personal financial situation and lender policy, you may be able to go up to 55% of your gross monthly income for your maximum debt load (in which case just replace 0.45 with 0.55 in the above calculations). But 45% is a good rule of thumb for 1st time buyers and many other buyers to use.
How Much Home Can You Afford?
When you’re looking at properties, online or in person, you can use a mortgage affordability calculator to determine the Monthly Housing Costs (PITI) of each home (based on its price, current interest rates, and your down payment) to see if it fits in your budget from above.
Or to determine the price of the home you may qualify for based on your monthly maximum housing payment, you can download our simple to use mortgage worksheet. Unfortunately, because of interest rate calculations and other factors such as different property taxes and condos fees for each home, it requires a little more intense math that you can’t do in your head easily (well, at least I can’t do in my head) so we’ve created the mortgage qualification spreadsheet for you to quickly figure it out.
I’m also more than happy to spend some time with you discussing your specific mortgage needs and budgetary concerns. Simply request a free mortgage consultation with me.