3 Steps to Figure Out How Much Mortgage You Can Afford

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Generally, the amount a lender will allow you to borrow for a mortgage is the amount at which the monthly loan payments (including principal, interest, property taxes, and homeowners insurance) equal no more than 28% of your gross monthly income. If you have excellent credit, some lenders may allow room for leniency. Additionally, your total debt payments (including the mortgage payment and all other debt) typically cannot exceed 36% of your monthly income.

While many borrowers use this as a guideline for the mortgage they can afford, it is really meant to be a lending guideline for how much you can borrow. However, the amount you should borrow is not necessarily the same as the amount you can borrow.

Follow this three-step process to help you determine how much you should spend on a home.

1. Prepare a Budget

In order to determine the mortgage payment you can afford, you need to first prepare a budget. It is critical to include the proper short-term savings and long-term investing in your budget before you establish the amount to allocate toward a mortgage payment. While owning a home can help build your net worth, it is an extremely illiquid asset that is not easily converted to cash. You should make certain that you have enough in short-term savings to pay your mortgage for at least six months in the event of an unforeseen financial setback. Also, make certain not to reduce your long-term savings goals for things such as retirement or your children’s future college education expenses.

2. Account for Increased Expenses

The good news is many of your budgeted items will not change with the purchase of a new home. For example, dining, food, clothing, and travel expenses will likely remain as they were before the move. However, some items like homeowners insurance, lawn care, pool maintenance, HOA dues, and utilities may increase when you purchase a residence. Property taxes will also likely increase, so just plugging in the amount the current owner pays may result in errors. If your purchase price is higher than the value listed on the tax rolls (as is commonly the case), you should recalculate the property tax based on the purchase price you will pay. It may take up to a year for the taxing authority to update the tax rolls, but eventually the purchase price will be used to determine your property tax due.

3. Determine Your Optimal Mortgage Payment

Once you have prepared a new budget, it will become apparent how much of a mortgage payment you can afford. If the amount you can afford is less than the amount you want to borrow, it may be necessary to adjust other budget items. Focus on reducing discretionary (non-essential) expenses. For example, you might consider reducing the amount you spend on vacations, entertainment, dining out, hobbies, and even your monthly television subscription so you can allocate more toward your new home. It is also a good idea to shop around for your auto insurance policy at the same time you are getting new homeowner insurance. Bundling these two policies with the same insurance company can often reduce your monthly premium by as much as 20%. All of these little changes to your budget can add up to a tidy sum that can help you purchase the home of your dreams.

Buying a home is no small feat, and there are many financial ins and outs to navigate as you prepare for this step in your life. As parting tips, don’t forget that you’ll need cash for your down payment (which will also influence the amount of your loan), and it’s helpful for you to check your credit report before speaking to a lender so you understand whether your lender will view you as a high-risk or low-risk borrower. Planning is key, and the more thought and energy you put into the process ahead of time, the more smoothly the home-buying process will go.

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The One Important Thing You Should Consider Before Buying a House

Renting is convenient in your early years, as you’re just getting a job and getting your life in order, perhaps even moving around for jobs, relationships and adventure.

But as you get older, you may start thinking about buying a house, whether because you’re partnered with someone or you are in a long-term career and want to settle down somewhere. After all, when you rent, your money is spent on a temporary place to live; but when you own a house, your money is spent on paying down the mortgage of a permanent asset that you own.

The Homebuying Process

Buying a house is a lot of work — you need to figure out what you want in a house, get pre-approved for a mortgage, find a real estate agent who can help you, go house-hunting and ultimately make an offer. And the work doesn’t stop there. Most people who have bought houses say that the real work begins once your offer is accepted and you move into your home.

Maybe you’re not in the homebuying process yet; maybe you’re still dreaming of what you want in a house, or which neighborhood or city you’d like to live in. Maybe you’re simply visualizing your future kids playing in the backyard or having the neighbors over for a barbecue on a warm summer evening.

No matter what stage you’re at, even if buying a house isn’t something you’re actively working on at the moment, you can take action today to help prepare by doing one simple thing: having a good credit score.

Work on Credit Now, Benefit Later

When you go to a bank to get pre-approved for a mortgage, the bank will check your credit and use that to help decide if they’ll lend you money and, if they do, what your interest rate will be. If you’re approved, the bank will likely give you a preliminary loan amount number that you can use to help you start your house-hunting. When you make an offer on a home, you’ll go back to the bank and, as long as your credit is still in good shape, you should be able to get that pre-approved mortgage.

In other words, your future homeownership really hinges on your credit. Therefore, if you plan to buy a house in the future (even if it’s a couple of years away in your mind’s timeline), you are already taking action today on that house purchase.

When you use your credit card, when you pay your credit card off, when you borrow money for a car loan, when you decide to apply for another credit card, when you lend your credit card to a friend — everything you do that impacts your credit is ultimately impacting your eventual homeownership, from how much money you’ll get for your mortgage to how much interest you’ll pay.

So if homeownership is a dream that you hope will turn into a reality someday, consider the decisions you’re making now and how they’ll influence your homeownership. To get started, you can see two of your credit scores for free on Credit.com. These scores are updated each month, so you can see where you stand now and what you need to do to get to where you want to be before heading to the bank to talk about mortgages.

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The True Cost of Living in America: Columbus, Ohio

When you think Ohio, you probably think Cleveland, and you might think Cincinnati. Almost certainly, you don’t think Columbus, but here’s a secret: Ohio’s capital city is larger than its more famous neighbors to the north and south. In fact, it’s the largest U.S. city to make Credit.com’s top 10 most affordable cities list. By some measures, it’s larger than Denver, Seattle, and Washington, D.C. And yet, it doesn’t feel crowded, said native Stu Stull.

“Best thing about Columbus is the ease of getting around and not having to waste time waiting for everything like Chicago, Washington, LA and other cities,” said Stull, 58. “There are no hour-and-a-half waits for dinner, no looking for 10 to 15 minutes for a parking space or waiting in traffic for way too long.” Except for college football Saturdays, of course.

stu stull

Stull was born and raised in the central Ohio city. He left briefly for Texas, but returned years ago and never looked back. A city employee, his mortgage on a small 3-bedroom house with a garden and screened-in patio eats up only 20% of his income.

“I can get downtown in half an hour and I am 10-plus miles away. Pro football, basketball, and baseball are within a two- or three-hour drive,” he said. The NHL’s Columbus Blue Jackets are right in town. “Concerts, like the Rolling Stones last year, and other entertainment comes here often.”

The Columbus economy weathered the recession better than many Midwest towns, thanks to its status as home of The Ohio State University and state government. But Columbus has a thriving private sector, too. Plenty of financial firms are located there — inexpensive housing helps keep labor costs down — like JPMorgan Chase, PNC Financial and Nationwide Mutual Insurance. It’s also a haven for fashion, and home to firms that operate Victoria’s Secret, Abercrombie & Fitch, and other well-known brands.

The Columbus economy was recently projected to possibly overtake Cleveland by 2018, according to the Columbus Dispatch.

Stull, who is a graphic designer and a part-time musician, said Columbus is still a place with a strong middle class.

“My experience when traveling to other cities is that life is easier here,” he said. “Most people are not living like a Kardashian no matter where they are.”

Columbus also has both old-world charm and hip hangouts. The historic district, German Village, makes drivers slow down with cobblestone streets. They should slow down anyway to see the gingerbread-like homes built by German immigrants who settled the area. The neighborhood is also home to one of America’s best independent book stores, Book Loft. Meanwhile, the Short North, near the city center, is a busy strip full of high-end restaurants and local pubs; it has the feel of an outdoor festival during every football weekend.

Columbus has its critics, of course. The winters are gray, and some residents lament that it’s a bit boring compared to coastal cities like New York. But with a median home sales price of around $117,000, perhaps there’s enough money left over for frequent trips to the Big Apple.

Stull might be a bit biased, but he said the music scene is surprisingly robust.

“It is a place without the extremes of other places,” Stull says. “To quote native James Thurber, ‘Columbus is a town in which almost anything is likely to happen, and in which almost everything has.'”

Life in Columbus, Ohio, by the Numbers

  • Affordable Cities Ranking: 9th
  • Housing Poor Residents: 30.4%
  • Median Home Sales Price: $117,475
  • Median Household Income: $46,481

Remember, a good credit score can help make housing more affordable in any area since it generally entitles you to better rates on a mortgage. Landlords also often look at a version of your credit report when considering tenants. As such, it can be a good idea to check your credit before you apply for a new place of residence. You can do so by pulling your credit reports for free each month at AnnualCreditReport.com and viewing your credit scores for free each month on Credit.com.

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Main Image: aceshot; Inset Image Courtesy of Stu Stull

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