What Size Mortgage Can You Afford?

by Stacy Francis, CFP®, CDFA

With real estate prices free falling in many areas, mortgages seem to be the topic on everyone’s minds. It is hard to narrow down all the different concerns people have into a structured format, but my facilitators report that one of the most frequently asked questions in the Savvy Ladies Empowerment Circles is: what size mortgage can I afford?

This is a great question! Even better, it has a simple and straightforward answer. Most lenders limit the size mortgage an individual or a couple can take on to 28% of the gross income. If you have other types of debt, the total payments for your debt, including your mortgage, needs to stay below 36%.

This comes as a surprise to many, as it is not unusual for people to spend 40% or more of their income on rent and still make all their payments on time. Because of this, some lenders will let you borrow a little more, especially if your credit rating is stellar or if you put down a decent down payment.

But what you also need to ask yourself is . . . how much can you pay, without having to cut down on things like contributions to retirement savings accounts? Don’t forget that taxes and insurance costs will pile up on top of your mortgage payment. As houses are illiquid (today more than ever), take an in-depth look at your finances – or hire an expert to do so – before you commit to a mortgage.

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