How Much Should You Borrow?

Right At Home Daily: Finding It: House-Hunting
By Margaret Crane for Right at Home Daily

Do you know how much of a mortgage you can afford?

Getting a home loan comes down to your income, investments, savings, and debts. It also means having enough cash on hand to make a down payment, usually a minimum of 3 percent of the purchase price, although some zero down loans are available.

How much you borrow also depends on where interest rates are at any given time. If interest rates are at 8 percent for a 30-year fixed-rate loan, and you have 20 percent to put down in cash, with few or no debts, many lenders will allow you to buy a home equal to three times your family's annual income.

However, if interest rates are at 10 percent, with the same down payment you might only be able to buy something that costs twice as much as your annual income.

Conventional lenders allow you to spend up to 28 percent of your gross monthly income (GMI) on your mortgage, taxes and insurance, and up to 36 percent of GMI on your total debt, including school and auto loans, and credit card debt. If you have no other debt, a lender will let you spend up to 36 percent of GMI on your mortgage insurance and taxes.

If you get an FHA loan,backed by the federal government, you may be allowed to spend as much as 43 percent of GMI on your total debt.

To get the total amount you can borrow, simply multiply your GMI by .28, .36, or .43. For example, if your annual salary is $60,000, your gross monthly income (GMI) is $5,000 per month. Multiply $5,000 by .28 and you will see you can spend $1,400 on your mortgage, insurance, and taxes.

Should you spend everything you can on a home? While lenders will allow you to weigh yourself down in debt, you might sleep better at night if you borrow less.

TAKE IT AND RUN
Before you borrow consider the following:

1. Different loan products carry different interest rates. A 30-year fixed rate loan will carry a higher interest rate than a 1-year, 3-year, or 5-year adjustable rate mortgage.

2. To get the total amount you can borrow, simply multiply your Gross Monthly by .28, .36, or .43.

3. Choosing an adjustable rate mortgage over a fixed-rate mortgage may allow you to buy a more or less expensive home.

4. Think about your lifestyle before you buy a home. You don't want your wallet to be empty after you pay your monthly food, clothing and shelter bills.

Have questions about financing a home? Visit our forum to get the answers you need.