How to Calculate the Home You Can Afford Based on Salary

by Mark Kennan

Before you start looking for a home, you should estimate the size of the mortgage you can afford. That way, you don't fall in love with a home, only to find out its way out of your price range. Besides your monthly income, factors affecting how much you can borrow include your existing loan payments, expected interest rate, loan term and other mortgage costs like real estate taxes and homeowner's insurance. The longer the loan term and lower the interest rate, the more you can afford.

Divide your annual pretax income by 12 to find your monthly pretax income.

Multiply your monthly pretax income by 0.28 and subtract your estimated real estate taxes, mortgage insurance premiums and homeowner's insurance to find your maximum monthly payment based on the front end ratio. For example, if you make $3,890 per month and you estimate your real estate taxes, mortgage insurance premiums and homeowner's insurance to be $300 per month, multiply $3,890 by 0.28 to get $1,089.20 and subtract $300 to find your maximum mortgage payment based on the front-end ratio equals $789.20.

Multiply your monthly pretax income by 0.36 and subtract your other loan monthly payments as well as the estimated real estate taxes, mortgage insurance premiums and homeowner's insurance to find your maximum monthly payment based on the back-end ratio. For example, if you make $3,890 per month and you pay $100 per month in student loans and estimate your real estate taxes, mortgage insurance premiums and homeowner's insurance to be $300 per month, multiply $3,890 by 0.36 to get $1,400.40 and subtract $400 a maximum monthly payment of $1,000.40 based on the back-end ratio.

Select the smaller of the front-end ratio and the back-end ratio as your maximum monthly payment. In this example, since $789.20 is smaller than $1,000.40, use $789.20 as your maximum monthly payment.

Look up the mortgage factor for your interest rate and mortgage term using an mortgage factor sheet. For example, for a 15-year term and a 5.25 percent rate, the factor equals 8.04.

Divide your maximum monthly payment by the rate factor and multiply the result by 1,000 to find your maximum monthly payment. In this example, divide $789.20 by 8.04 to get 98.159 and multiply that by 1,000 to find you can afford a mortgage of $98,159.

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