How Much House Can I Afford and How Much House Can I Qualify For?

It is such a difficult and loaded question isn’t it? But, just how much of a house can you afford?

Since this is one of the first questions that you have to answer when you begin your quest for home ownership, I figured I would investigate this matter to try to internalize it, and hopefully, help all of you in the process!

Start With Your Monthly Income
As you might have guessed, the best place to start finding an answer to this question is your current monthly income (gross – before taxes). The approximate value of the mortgage payment you can comfortably afford (allows room for monthly debt and living expenses) is 28% of your monthly gross income.

Calculate the Mortgage Amount that You Can Comfortably Afford
To assist you in calculating the amount of a mortgage that you can afford, I created the Google Docs spreadsheet at the link below.

Google Docs – How Much Mortgage Can You Comfortably Afford?

After clicking on the link, save a copy on of the spreadsheet on your hard drive so that you can edit it. Next, enter the following details according to your specific situation, or just leave them as the default values.

  • Term of the fixed rate loan
  • Interest rate you assume you will get on the loan
  • Your gross monthly income – this is your income before taxes are taken out.
The spreadsheet will then calculate the mortgage payment amount you can afford by multiplying your monthly gross income by the 28% value specified above, and it will automatically place this value as your assumed payment in every period of the mortgage.
Next, you will use the Solver function in Excel in the following way, in order to calculate the mortgage loan amount you can afford (blue highlighted cell A2).
  • Open up the Solver, or Goal Seek Functions in Excel.
  • Specify that you want to set Target Cell G361 (for 30 year mortgages) or G181 (for 15 year mortgages) to a value of “0” by changing cell A2.
  • This will then find the home mortgage loan amount that will cause you to completely pay off your loan principal by the end of the loan term, given the set monthly payment amount you calculated (28% of your gross income).

For my specific situation, in graduate school this fall, I will be making $23,000 per year from my research assistantship (monthly gross income of $1917). This means that I can afford a mortgage payment of $537 per month, without assistance from family. Very nice!

By running the Solver calculation as described above, Excel tells me that I should be looking for a home mortgage loan of no more than $95,535 so that I can still live comfortable. This seems reasonable for sure!

Now, remember, the mortgage payment will include four components – mortgage interest, principal, homeowners insurance, and real estate taxes. Additionally, the mortgage amount does not include the down payment on the house. Keep these things in mind as we are discussing this topic.

How Much of Mortgage Can You Qualify, or be Approved, For?
For this section, I have to start by explaining that mortgage brokers and real estate agents are almost always compensated on a % basis.

And, as such, they financially benefit by putting you in a more expensive house – and even a one that is more expensive than you can afford. Of course, this is just another reason why you want to make sure you choose carefully when selecting professional help. However, what are the financial ramifications of this, and how do you determine the biggest house that you can possibly qualify for?

So, while the 28% rule described above is the suggested mortgage amount that you can afford comfortably, as it turns out, mortgage lenders can actually lend you money such that your total monthly mortgage payment + other consumer debt equals 40% of your gross monthly income. Note: this is just debt – it does not include living expenses (food, etc).

To assist you in determining the loan amount that you can qualify for, I created the Google Docs spreadsheet at the link below. At a high level, it works by calculating the loan amount you can obtain so that the monthly loan payment added to your existing debt is equal to 40% of your monthly gross income.

Google Docs – How Much of a Home Mortgage Can You Obtain?

To use it, perform the following steps:

  • Click on the link above and download a copy of the spreadsheet on your hard drive so that you can edit it with your specifics.
  • As before, enter the interest rate, loan term, and monthly gross income fitting your situation.
  • Additionally, in the purple highlighted cell area to the right of the ammortization schedule, enter the quantities of your monthly debt.
  • The spreadsheet will then automatically calculate the maximum amount of a monthly mortgage payment that you can qualify for.
  • Next, using the Excel Solver or Goal Seek function, specify that you want to set Target Cell G361 (for 30 year mortgages) or G181 (for 15 year mortgages) to a value of “0” by changing cell A2.
  • This will then find the home mortgage loan amount that will cause you to completely pay off your loan principal by the end of the loan term.
It is interesting to note that in my situation, since I have no debt, the 40% maximum limit would in fact qualify me for a home loan of $135,000. Wow! Quite a difference isn’t it? Even though I may indeed qualify for a loan at this higher limit (or even more of a loan if I ever decided to refinance my mortgage at lower interest rates), I would definitely want to investigate my financial situation before committing to this.
Give these tools a try for your situation and let me know how it goes!
Keep on learning,

Jacob

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