How Much Mortgage Loan Can You Afford?

Before you go home shopping, you should figure out how much mortgage loan you can afford. Your mortgage – and any down payment you’ve saved up – will directly impact how much home you can buy. The amount of loan you can afford depends on your current income and expenses. Generally, the higher your income and lower your expenses, the higher mortgage loan you can afford.

Front-End Ratio

Most conventional mortgage loans – those loans that aren’t government-funded – expect that your housing expenses be less than 28% of your monthly gross income. Twenty-six percent (26%) is ideal. This percentage is known as a front-end ratio.

If you gross $3,000 each month, your housing expenses should be between $780 and $840 each month. Housing expenses include your monthly mortgage payment, homeowner’s insurance, property taxes, and private mortgage insurance if your down payment was less than 20% of the purchase price.

Government mortgage lenders, like those offering FHA loans, look for housing expenses to be less than 29% of your monthly gross income. That’s $870 if your monthly gross income is $3,000.

To figure out how much mortgage loan you can afford, multiply your monthly gross income by the appropriate percentage: 28% for a conventional mortgage or 29% for an FHA mortgage loan.

Back-End Ratio

Some mortgage lenders also include your long-term debt payments when they’re deciding how much mortgage you can afford. Long-term debt is any debt that you’ll be paying on for more than a year. This includes student loans, car loans, and credit card balances. Conventional mortgage lenders look for a “back-end ratio” that’s between 33% and 36% of your monthly gross income.

If your monthly income is $3,000, then your debt payments and housing expenses combined should be between $990 and $1080.

FHA loans look for a ratio that’s less than 41% – $1,230 on a monthly gross income of $3,000.

Lenders usually look at both front-end and back-end ratios to figure out how much mortgage loan you can afford. Your monthly income may be enough to support a mortgage loan that’s one amount, but your monthly debt payments may decrease the amount you can afford to pay on housing expenses enough month. Paying down your debt before getting a mortgage will increase the amount of mortgage you can afford.

Mortgage Payment vs. Mortgage Amount

It’s hard to translate a monthly mortgage payment into a full mortgage amount because interest also has to be considered. The higher your interest rate, the lower the mortgage you can afford. That’s because a large percentage of your initial mortgage payments will go toward paying interest.

A good credit history allows you to qualify for a lower interest rate, while bad credit history will force you into paying higher interest rates. If you have excellent credit, you may qualify for a low 4% interest rate and you’d be able to get mortgage loan around $147,000. On the other hand, if your bad credit only allowed you to qualify for a 9% interest rate, you’d only be able to afford a mortgage of about $87,000.*

*These figures are based on the mortgage payment table provided by the FCIC. They assume a $3,000 monthly income, $700 monthly mortgage payment and leave room for property taxes and homeowner’s insurance.