When shopping for a home, it’s important to determine the maximum mortgage and home price you can qualify for. Mortgage affordability refers to how much you can afford to borrow from a mortgage provider – your maximum affordability is simply the maximum amount that you can borrow. To determine your maximum affordability, lenders take several factors into account. The two primary factors that will be considered are:
- Your down payment
- Your debt service ratios (based on your income and current debt obligations)
A Sample Maximum Affordability Calculation
Let’s look at an example where your gross annual income is $75,000. You’re buying a home with annual property taxes of $3,600, monthly heating costs are $200 and since you’re buying a house, there are no condo fees.
In addition to your housing expenses, you have a monthly car loan at $300 and must make minimum monthly payments of $250 on your credit card debt. You have $20,000 saved up for a down payment.