Figuring Out How Much Loan Payment You Can Carry

• Down payment aside, brokers say you should only spend between 25 and 33% of your monthly gross (before taxes) pay on housing.  Here’s a chart to help you figure out how much loan payment your income can carry:

1)            Gross monthly income from all sources:                ______
2)            Divide by four or three:                                          ______
3)            Subtract present monthly debt service:
                    Credit cards            ______
                    Car loans                ______
                    Other debt              ______
                    Total debt                                                           ______
4)            Equals maximum monthly payment                        ______

• Let’s say your monthly gross income is $5,000 ($60,000 annually). Divide by four ($1250) or three ($1667). Let’s say you have a car loan ($150/month) and you’re paying off a credit card balance ($100/month). 

$1250-$250= $1000 or $1667-$250= $1417

In this example, you’d be able to spend between $1000 and $1417 a month on your principal and interest payments, real estate taxes, and insurance.  If real estate taxes are $100/month and insurance is another $50/month, that will leave you between $850 and $1267 to spend on a mortgage.

Here’s how to calculate the amount of the mortgage you can afford to carry: Multiply the net amount you can spend ($850 to $1267) by twelve (for an annual mortgage amount), then divide that number by the current prevailing interest rate (say, 7 percent for a 30-year fixed-rate loan).

25% of gross income: $850 x 12 = $10,200 ÷ .07 = $145,714
33% of gross income: $1267 x 12 = $15,204  ÷ .07  = $217,200

So how much house can you afford?  Assume you add a 20% down payment to each of these mortgage amounts (divide $145,714 or $217,200 by 5 and add that number to the total).

$145,714  + $29,142  = $174,856
$217,200 + $43,440= $260,640

According to these calculations, on a $60,000/year income, assuming you have 20% to put down in cash, you’d be able to afford a home that costs between $174,856 and $260,640.

The 7% interest rate allows you to purchase a home between two and a half and nearly four times your income!