Chapter 5:       How much can I afford to spend?

For a general idea of how much you can afford to spend, multiply your annual gross income by 2½.  For example, if your gross income is $30,000, you might be able to qualify for a $75,000 home.  The actual number may be more or less, depending upon your individual situation, debts and credit history.

Mortgage lenders generally use two ratios to help determine how much you can afford to spend each month on your mortgage payment.

1.         Housing Expense Ratio

With the housing expense ratio, your monthly mortgage payment should be less than or equal to about a quarter of your gross monthly income. That means if your paycheck is $2000/month, then your mortgage payment should be no more than $500.  The percentage can change depending on the type of mortgage you choose.  

2.         Debt-to-Income

Your buying power can be affected by factors such as your income, debt, and credit history.  Your debt, such as credit card bills, car loans, and other expenses such as housing expenses, alimony and child support, should not be more than about 30-40% of your gross income.  For example, if your gross monthly income is $2000, then your total monthly debt including your mortgage payment should not exceed $600-$800/month

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