Thursday, January 6, 2011

Will a mortgage break my bank?

How much can you spend on a house?

As of 2010, lenders, do not want your mortgage payment to exceed 28 percent of your gross monthly income. The lender takes into account the actual mortgage payment, interest on the payment, property taxes and your homeowner's insurance. The total of these factors should never exceed 28% of your pretax (gross) income each month.
To calculate what your maximum monthly mortgage payment allowed by the lender will likely be, multiply your yearly salary by 0.28, then divide that number by 12.

But how much is that really?

For most people, they need the bottom line. Do you have credit cards? Car payments? Medical expenses? When it comes down to shelling out the cash, all these items do not come out of your GROSS income, they come out of your NET income. That being said, you should know your net income. Let's say you and your spouse make a combined income of $75,000 (after deductions). You are likely in the 25% bracket for federal taxes if filing jointly. So you owe about $11,000 in federal tax. (Your income is now $64,000.) And in MN, you will owe approximately another $11,000 in state taxes. (Your income is not $53,000.) So using the mortgage calculation above, ($75000x.28=$21,000/12=$1750 per month), your "maximum mortgage payment" would be about 40% of your income after tax.

Do you have other expenses each month?  Of course!  So how do you know what will be a comfortable mortgage payment for you? Break out the Excel spreadsheet. It's time to figure out your budget!  Some people just cringed and thought "Forget that" but don't move on just yet.  What are you currently paying in rent?  Is it comfortable? Then just use that as the base in your head and contact a lender to help you work the numbers to find a mortgage what you can afford for that payment. :)

(Disclaimer: Not everyone qualifies for a mortgage.)
Need answers to your mortgage questions?  Click here:

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