what mortgage can i afford with my salary
I’ve been in the market for a new home for a while now, and one of the biggest challenges I’ve faced is figuring out how much I can afford to spend on a mortgage. There are so many factors to consider, like my income, my debt, and my expenses. I’ve done some research and talked to a few financial advisors, and I’ve come up with a few tips that have helped me determine what mortgage amount is right for me.
Calculate Your Gross Monthly Income
The first step in determining how much you can afford to spend on a mortgage is to calculate your gross monthly income. This is the total amount of money you earn before taxes or other deductions. To calculate your gross monthly income, simply add up all of your income from all sources, including your salary, wages, bonuses, commissions, self-employment income, and any other regular income.
Once you have calculated your gross monthly income, you can move on to the next step, which is determining your monthly debt payments.
Example⁚
Let’s say that you earn a monthly salary of $5,000 and you also receive $500 in monthly bonuses. Your gross monthly income would be $5,500.
Gross Monthly Income = $5,500
Determine Your Monthly Debt Payments
Once you have calculated your gross monthly income, the next step is to determine your monthly debt payments. This includes all of your recurring debt obligations, such as your mortgage or rent payment, car payment, student loans, credit card payments, and any other regular debt payments.
To calculate your monthly debt payments, simply add up all of your monthly debt payments. This will give you a good idea of how much of your income is already going towards debt repayment.
Example⁚
Let’s say that you have a mortgage payment of $1,500, a car payment of $300, and student loan payments of $200. Your total monthly debt payments would be $2,000.
Monthly Debt Payments = $2,000
Once you have calculated your monthly debt payments, you can move on to the next step, which is calculating your front-end ratio.
Calculate Your Front-End Ratio
Your front-end ratio is a measure of how much of your monthly gross income is going towards housing expenses. Lenders typically want to see a front-end ratio of 28% or less. This means that no more than 28% of your monthly gross income should be going towards your mortgage payment, including principal, interest, taxes, and insurance (PITI).
To calculate your front-end ratio, simply divide your monthly housing expenses by your monthly gross income and multiply by 100.
Example⁚
Let’s say that you have a monthly gross income of $5,000 and your monthly housing expenses are $1,200. Your front-end ratio would be 24%.
Front-End Ratio = (Monthly Housing Expenses / Monthly Gross Income) x 100
Front-End Ratio = ($1,200 / $5,000) x 100
Front-End Ratio = 24%
If your front-end ratio is higher than 28%, you may need to adjust your budget or consider a lower-priced home.
Calculate Your Back-End Ratio
Your back-end ratio is a measure of how much of your monthly gross income is going towards all of your debt obligations, including your mortgage payment, car payment, credit card payments, and any other loans. Lenders typically want to see a back-end ratio of 36% or less. This means that no more than 36% of your monthly gross income should be going towards debt payments.
To calculate your back-end ratio, simply add up all of your monthly debt payments and divide by your monthly gross income and multiply by 100.
Example⁚
Let’s say that you have a monthly gross income of $5,000 and your monthly debt payments are $1,500. Your back-end ratio would be 30%.
Back-End Ratio = (Monthly Debt Payments / Monthly Gross Income) x 100
Back-End Ratio = ($1,500 / $5,000) x 100
Back-End Ratio = 30%
If your back-end ratio is higher than 36%, you may need to adjust your budget, consider a lower-priced home, or consolidate your debts.
Consider Other Factors
In addition to your income, debt, and expenses, there are a few other factors you should consider when determining how much mortgage you can afford. These include⁚
- Down payment⁚ The amount of money you put down on your home will affect your monthly mortgage payment. A larger down payment will result in a lower monthly payment.
- Interest rate⁚ The interest rate on your mortgage will also affect your monthly payment. A higher interest rate will result in a higher monthly payment.
- Property taxes and insurance⁚ You will also need to factor in the cost of property taxes and insurance when budgeting for your mortgage. These costs can vary depending on the location and value of your home.
- HOA fees⁚ If you are buying a home in a homeowners association (HOA), you will also need to factor in the cost of HOA fees. These fees can cover the cost of common areas, amenities, and maintenance.
- Your financial goals⁚ It is important to consider your financial goals when determining how much mortgage you can afford. For example, if you are planning to retire in the next few years, you may want to keep your mortgage payments low so that you have more money available for retirement savings.
Once you have considered all of these factors, you can start to get a better idea of how much mortgage you can afford. It is important to be realistic about your budget and to make sure that you can comfortably afford your mortgage payments each month.