One of the first steps in the home buying process is evaluating
your finances. This evaluation involves calculating
your earnings verses what you owe in order to determine how much
you can comfortably spend on a house. The general rule
of thumb is that you only by a house that equates to 2.5 times your
annual salary.
- First, determine your gross monthly income. This includes
all income that you can document and include on your tax
return. Remember you may also include other income, not
just your W2 or 1099 income.
- Second, calculate your debt. This includes all
monthly debts such as credit cards, installment loans, auto or RV
loans, personal loans, debts or any other monthly obligations such
as alimony or child support. With revolving debts like credit
cards, use the minimum monthly payments and with installment loans,
use the current monthly payment. All debts that will be
paid off in less than 10 months can be excluded.
- Third, look up the taxes and insurance rates for the
property. If you don't know these numbers, taxes may be
estimated from 1 to 3.5% and insurance around .5%.
Once the numbers are in, you are ready to try the How Much Can I
Afford calculator!
In most circumstances, the housing expense plus taxes and
insurance should not exceed 28% of your gross monthly
income. In addition, your proposed monthly expense plus
your total debt cannot exceed more than 36% of your gross monthly
income. Government loans, FHA and VA, will allow higher
percentages.
While this may give you a good idea of what you can afford,
there are many areas of flexibility depending upon your specific
situation. With so many mortgage options
available and different ways to calculate your finances, why not
utilize our free services? Let one of our
mortgage experts work the numbers for you and take you to the next
level! Give us a call!
How
Much Can I Afford Calculator