How Do You Determine How Expensive a House You Can Afford?


Quick Answer

Using a maximum mortgage calculator gives prospective home buyers an idea of how much they can afford to take on in a mortgage, according to Bankrate. Such information as income, the terms of the loan and the monthly budget for expenses combine to calculate a cap for manageable mortgage payments.

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Full Answer

Maximum mortgage calculators generally follow the housing expense ratios that lenders use. The total of housing expenses, including principal and interest, property taxes, homeowner's insurance, homeowner's dues and private mortgage insurance is generally 28 percent of before-tax income. The common term for this percentage is the front ratio, notes Investopedia.

In cases where the home buyer has a superior credit rating and payment history, or the transaction offers a relatively low loan-to-value ratio, some lenders permit a ratio higher than 28 percent. Applying for the mortgage with a co-borrower often lowers the housing expense ratio as two incomes go into the calculation. Choosing interest-only loans or other products that offer low payments up front is another way to keep that ratio low, but some of those products have large balloon payments looming off in the future, so it's important to be cautious of those type of loans, as stated by Investopedia.

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