Amount You Can Afford For A Monthly Mortgage Payment
The amount you can afford for a monthly mortgage payment depends on your debt to income ratio and your monthly borrowing power which are very similar formulas. Your debt to income ratio is the percentage of your debt divided by your gross income to get a ratio that needs to be under 40%. That amount is your monthly borrowing power. Then you can use a mortgage calculator to see how much the mortgage payment would be on the home you wish to buy. You'll also have to add the monthly taxes in and keep it under 40%.
Take you gross monthly income and subtract all the current loans you have to get the current borrowing power per month for you. You don't have to subtract spending money or housing expenses because they're included in the 60% the bank takes off your gross income. It also includes the taxes on your pay check.
If you monthly borrowing power is about $1000 and you use the mortgage calculator to see that your monthly payment will be $900 and monthly taxes will be $200 then you probably won't get approved for the loan. You'll have have 3 choices from there:
1) Lower the mortgage amount on the calculator to see the amount that gives you $100 less per month so that you can afford it and start looking for homes in that price range.
2) Lower the interest rate on the calculator to see if you could possibly negotiate it or find a bank that might offer you an interest rate that low.
3) Increase you're down payment amount so that it lowers you monthly mortgage payment by $100. That amount should be the same amount as #1 above because it's less money being borrowed from the bank.
If you're looking at condos then you can also find a condo complex with a lower monthly condo fee. I've seen these condo fees range anywhere from $100 to $400 per month. If you save $200 on your condo fee then you can afford $35,000 more worth of home instead!
Monthly Borrowing Power = $1300
|
$150,000 at 6% = $900
Condo Fee = $400
Total = $1,300 |
$185,000 at 6% = $1,100
Condo Fee = $200
Total = $1,300 |
A lot of people go to the bank and ask "How much can I afford?" That's the wrong question! You should ask "What's my monthly borrowing power?" That way YOU can decide whether you want a $150,000 home with a high condo fee or a $185,000 home with a lower condo fee. The same goes for taxes as well. If you have a home with lower taxes it increases your borrowing power because you have $1,300 to spend plain and simple. Not a maxinmum of $150,000 because it doesn't make sense.
You make a certain income per month and have a certain amount of debt and spending. The bank is trying to figure out the difference so they can loan you money. They use a mortgage calculator as well to see the monthly mortgage payment for the home you want. If the mortgage payment is less than the amount you can afford they'll give you the money! As long as you have a good credit score because they won't loan you money if they can't trust you'll pay it back. | 
