December 10, 1999
Borrowers often begin their home
search with only the foggiest idea about how much they can afford to pay,
which can result in wasted time and frustration. They should know
approximately how much they can afford before they start to shop.
The amount you can spend on a
house depends on your income, the amount of cash you can allocate to the
transaction, and the mortgage terms available in the market at the time
you are shopping. These include interest rates, points, term, down payment
requirements, and the maximum allowable ratio of housing expense to
income. In addition, affordability may be affected by your existing
indebtedness if this is higher than the indebtedness that lenders are
willing to accept, and by closing costs which vary from one part of the
country to another.
The table below provides some
ballpark estimates of how much house you can afford with a 7.5% 2 point
mortgage for 30years. For each of 7 sale prices, the table shows the
total cash required to meet down payment requirements and settlement
costs, the total monthly housing expense, the minimum income required to
cover housing expenses, and the maximum amount of debt service allowable
on the minimum income.
To afford a $400,000 house,
for example, you need about $59,200 in cash, which assumes a 10% down
payment. Your monthly income should be at least $11,284, and (if this is
your income) your monthly payments on existing debt should not exceed
$905.
These numbers were calculated from
the Housing
Affordability calculator. They are estimates because the assumptions
used may not correspond exactly to any individual situation. However, you
can use the calculator and change any of the assumptions as you please.
For further information on how lenders qualify you for a loan, read Qualifying
For a Mortgage.
The table assumes that you push
your buying power to the limit, which may or may not be what you want to
do. In particular, the table assumes that your down payment will be the
lowest lenders are willing to accept, which obliges you to purchase
mortgage insurance, which increases your borrowing cost. Hence, it may not
be prudent to push your borrowing power to the limit. For a discussion of
how much you should invest in a house, as opposed to the maximum amount
you can afford, read How
Much House Should You Buy?
How Much
House Can You Afford With a 7%/2 Point/30Year Mortgage?

To Spend
This Amount on a House�

You Need At
Least This
Gross
Monthly Income�

To Cover
This Monthly Housing Expense�

Other
Monthly Debt Payments Should Not Exceed�

And You
Need at Least This Much Cash�

For the
Down Payment Lenders Are Likely to Require�

And the
Closing Costs

$400,000

$11,290

$3,160

$903

$59,200

$40,000

$19,200

350,000

10,260

2,871

820

51,800

35,000

16,800

300,000

8,790

2,461

703

44,400

30,000

14,400

250,000

7,330

2,051

586

37,000

25,000

12,000

200,000

6,280

1756

502

19,800

10,000

9,800

150,000

4,710

1317

376

14,850

7,500

7,359

100,000

3,230

903

258

7,940

3,000

4,940

Notes: Minimum monthly income is
based on a ratio of monthly housing expense to income of 28%. Closing
costs excluding points are assumed to total 3% of the sale price. The
maximum monthly debt service payment is assumed to be 8% of minimum
monthly income. Monthly housing expense includes principal and interest,
mortgage insurance, taxes and hazard insurance. Taxes and hazard insurance
are assumed to be 1.825% of sale price. The down payment requirement is
assumed to be 10% on prices of $250,000400,000, 5% on $150,000200,000,
and 3% on $100,000. Mortgage insurance premium rates are .9% with 3%
down,.78% with 5% down, and .52% with 10% down.
Copyright
Jack Guttentag
2002
