You can use a home loan payment calculator to help manage your budget and see how a monthly mortgage payment will impact your overall finances. But first, you’ll need to understand how lenders calculate what you can afford.
How lenders decide how much you can afford
Lenders use your debt-to-income (DTI) ratio to decide how much to lend you. Your DTI ratio is calculated by dividing your total monthly debt — including your new mortgage payment — by your monthly pretax income.
DTI requirements vary by loan type and lender, but generally range from 41% to 45%. But if you know you can afford it and want a higher debt load, some loan programs — known as nonqualified mortgage or “non-QM” loans — allow higher DTI ratios.
Example: How DTI ratio is calculated
Let’s say your total monthly debt is $650 and your pretax income is $5,000 per month. You’re considering a mortgage with a $1,500 monthly payment. Based on $2,150 in total monthly debt payments, your DTI ratio would be 43% ($2,150 ÷ $5,000).
How you can decide what you can afford
Before committing to a mortgage loan, sit down with a year’s worth of bank statements to get a feel for how much you spend each month. This will give you a realistic sense of the monthly mortgage payment you could afford without stretching your finances too thin.
There are a few rules of thumb you can go by:
- Spend no more than 30% of your income on housing. Your housing expenses — including mortgage, taxes and insurance — shouldn’t exceed 30% of your gross income. If they do, you may want to consider scaling back your budget.
- Spend no more than 36% of your income on debt. Your total monthly debt load, including mortgage payments and other debt you’re repaying (like auto loans, personal loans or credit cards), shouldn’t exceed 36% of your income.
Why shouldn’t I use the full mortgage loan amount my lender is willing to approve?
- Lenders don’t consider all your expenses. A mortgage loan application doesn’t require information about car insurance, entertainment costs, groceries and other lifestyle expenses, which can take up a big chunk of your budget.
- Your take-home pay is less than the income lenders use to qualify you. Lenders look at your before-tax income for a mortgage, but you live off what you take home after your paycheck deductions. Be sure you have leftover cash after you subtract the new mortgage payment.
How much money do I need to make to qualify for a $400,000 mortgage?
The answer depends on several factors, including your interest rate, down payment amount and how much of your income you’re comfortable putting toward your housing costs each month. Assuming a 6.9% interest rate and a down payment under 20%, you’d need to earn at least $150,000 a year to qualify for a $400,000 mortgage.
That’s because most lenders’ minimum mortgage requirements don’t usually allow you to take on a mortgage payment that would amount to more than 28% of your monthly income. The monthly payments on that loan would be about $3,301.
Is $2,000 a month too much for a mortgage?
A $2,000 per month mortgage payment is too much for borrowers earning less than $92,400 a year, according to typical financial advice. How do we know? A conservative or comfortable DTI ratio is usually considered to be anywhere from 1% to 26%, if you only include mortgage debt. A $2,000 per month mortgage payment represents a 26% DTI if you earn $92,400 per year.
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