This home affordability calculator helps you figure out how much mortgage you can afford based on your current annual income, debts and house loan assumptions. More on this subject you can read below the calculation form.

Your annual income and monthly debt obligations
Current total annual gross income:  *
\$
Monthly child support payments:
\$
Monthly credit cards payments:
\$
Monthly auto payments:
\$
Other monthly fees (e.g association fees):
\$
Other monthly obligations:
\$

New loan assumptions - for buying the new house
Annual interest rate:  *
%
Term of the new mortgage in years:  *
Your funds for a down payment:
\$
Estimated annual property taxes:
\$
Estimated annual homeowner's insurance cost:
\$
Front-end ratio:  *
%
Back-end ratio:  *
%

## Understanding home affordability

The term of home affordability defines the capacity to lend money of a person whom might already own other debts and obligations and whom wants to take a mortgage for a home buy. The capacity to borrow money of a person is assessed by a lender whom wants to ensure that the debtor has the financial means to pay off the principal owed and the cost of the money.

## How does this home affordability calculator work?

Buying a new house is one of the hardest decisions to make in life and beforehand, it is obvious that you should have a clear image of all financial aspects. That means the first thing you need to know is how much does the house you want to buy cost, second you need to know how much money you have available for a down payment and last but not least you need to find out how much mortgage you can afford to borrow. Here may come in handy our home affordability calculator that lets you assess your capacity of taking a loan. It requires you to input data related to your income and current monthly debt obligations as well as the new loan assumptions.

The results displayed by this calculation form are detailed in the following rows:

- The home value you can qualify for at this moment;

- Mortgage amount you can qualify for;

- The maximum monthly housing allowance (including taxes and insurance) percentages that will be capped by the lenders taking account the two end ratios specified (front end ratio and back end ratio);

- The ratio you have been capped within the scenario;

- Your monthly housing allowance percentage of your total monthly gross income;

- Your total monthly obligations (including next monthly housing allowance and any other long-term debt obligations) of your total monthly gross income;

- Front end ratio results;

- Back end ratio results.

## How much home can I afford?

It has been proved that in general homeowners can afford to mortgage a property that implies a cost between 2 and 2.5 times their annual gross income. According to this figure, a person that earns \$200,000 per year can afford to mortgage between \$400,000 and \$500,000. Please note that this figure presents a general guideline, while for a more accurate analysis of your own case you should take into account many other aspects. It is recommended to contact lenders and check their policies or you can check in advance with this home affordability calculator the house value you may qualify for and how much you can actually borrow.

First of all, even more than ever within these economical and financial times it is recommended to have a very good understanding of what is your lender opinion on how much you can afford. The lenders have a historical data on how their clients handle their mortgages, and are also in their interest to let you know your optimal mortgage size.

Second of all, is always good to look at your profile in order to determine not only your financial situation but also your personal situation especially if your regular income is safe and what are your perspectives for the coming years.

To make an objective analysis it is always good to start with the lender’s criteria that define their perspective on how much you can afford. You can find below few aspects you should be aware of when making the decision to buy a new house:

• Front-End Ratio is the percentage of your yearly gross income allocated to pay your monthly mortgage. The mortgage payments consists of four elements: principal (part of the initial loan amount taken), interest (the amount of money paid as interest for the loan amount), taxes and insurance;
• Back-End Ratio is the debt-to-income ratio (DTI). Back end ratio represents the percentage of your gross income needed to cover your debts (such as mortgage, credit card payments, child support and any other loan payments). Lenders recommendation is that the DTI should not exceed 36% of your gross income. In order to figure out your maximum monthly debt based on this back end ratio you should multiply the annual gross income by 0.36 and divide by 12 (which comes from the no. of months). For instance, someone who earns \$200,000 per year the maximum monthly debt should not be greater than \$6,000.
• Down Payment is the amount of money the debtor has available and is willing to pay with it a part of the house price in order to minimize the insurance requirements. The most practiced level is 20% of the home price and has a direct impact on the mortgage payment.

Buying an expensive house instead of a cheaper one is a personal choice. It is not only the “choice” of the lender that finances or not your acquisition. From this point of view, there are a lot of people who have such high monthly payments generated by their mortgage and/or by their monthly maintaining cost that they are the “house poor” ones. It is up to you to be realistic or not. This is rather your decision and you should make it based on few criteria we shortly present below:

• Income: look at your income. You probably know better than anyone what you can afford or not. Ask yourself: Can I afford that level of mortgage or not? Will my standard of life be the same? If not, can I handle? Is my job stable? Is my income stable for the next years?
• Expenses: look at your expenses too. Try to reduce them while keeping as much as possible the desired standard of life. Try to answer questions like: am I going to have kids at school someday? How am I going to deal with that? What other plans do I have? Can I keep them all?
• Lifestyle: if the lender can tell you how much house can you afford, you are the only one that can tell if you are available and able to change your lifestyle as a consequence of the monthly payments you should make for the new mortgage. If there are things or hobbies you cannot renounce at, analyze them deeper before taking a new mortgage. Usually mortgage comes with undesired lifestyle changes and you should be prepared for.
• Personality: before taking a mortgage you should analyze the way you are going to deal with the stress of having it. There are people that are emotionally affected by the stress of having debt and monthly payments to make, while others can sleep soundly at night with no stress at all.

08 Dec, 2014 | 0 comments