How much house can you afford? For many people, this is a difficult question to answer because they do not understand all of the factors that go into making this determination. While every bank will have its own way to determine this number, most of them seem to follow some general guidelines. In general, banks will look at your income, overall amount of debt, and size of your down payment in order to determine how large of a mortgage you qualify for.
When you first start to look for a mortgage, one of the first questions you will be asked is how much income you make. This is so the bank can determine how high of a mortgage payment you can make every month. As a very general rule, lenders like to see your total monthly payment, including your taxes and insurance, be no more than one third of your net income.
Very few banks have set income requirements for owning a home, however. In recent years, banks were willing to let people take out mortgages that required them to pay about half of their monthly income. With the recent crisis in the housing market, however, loans like these are becoming increasing uncommon. In fact, many banks have started to require people applying for mortgages to have a total monthly payment that is no more than one quarter of their net pay.
Income is not the only factor that will determine your eligibility for a mortgage. Banks will also look at the total amount of debt payments you make each month. In general, a bank will want to see that you spend no more than twenty percent of your take home pay on debt payments before taking out the mortgage, and no more than fifty percent of your take home pay on debt repayment after taking out the mortgage.
For this reason, it is usually recommended that people with high amounts of debt pay off as much as possible before applying for a mortgage.
Today, many banks and lenders are also requiring potential candidates for a mortgage to have a down payment. Historically, lenders required down payments of twenty percent or more. During the housing boom, most lenders required no down payment. Today, a lot of lenders require people to have at least a five percent down payment in order to qualify for a mortgage.