How much can I borrow to buy a house?

How-much-can-I-borrow-to-buy-a-houseIt depends on your income, on how much debt you already have, and on current interest rates.

 For mortgages up to $214,600, the lender's rule of thumb is that your total monthly housing cost mortgage payment, property taxes, and homeowners insurance should total no more than 28 percent of your monthly gross income. Your monthly payments on all outstanding debt housing costs, alimony and child support obligations, student loans, credit card debt, and any installment debt on which there are 10 payments or more to go generally can't exceed 36 percent of your monthly gross income.

 Lenders are a bit more generous if you're borrowing more than $214,600; your monthly housing cost and total debt payments can add up to 33 percent and 38 percent of your income, respectively. Sometimes they'll stretch the debt to income ratio even more if your credit is good.

 Let's assume you earn $60,000 a year and pay $500 a month to creditors. Divide your gross annual income by 12 to get your monthly income $5,000. Multiply that monthly income by 36 percent to find out the maximum monthly debt you're allowed under bank guidelines $1,800. Subtract your current monthly debt ($1,800 minus $500) and the result is the maximum housing cost a bank will think you can afford: $1,300 a month for mortgage, homeowners insurance, and property taxes.

 But that doesn't mean you really can afford it. On paper, you're likely to qualify for a bigger mortgage than you can comfortably carry, because the lender's debt guidelines don't factor in monthly expenditures like the cost of child care, medical care, life insurance, or investing for retirement, let alone expenses like eating out, going to the movies, or taking an annual vacation.

 You also need cash in hand for a downpayment, which is generally equal to 20 percent of the purchase price.

 But your downpayment can be as little as 5 percent of the purchase price, if your credit is good. Most lenders want that 5 percent downpayment to be your own money, not a gift from your parents, says Tuchman. (A loan from your 401 (k) plan qualifies as your own money; but your repayments to the 401 (k) plan are included in the debt-to-income calculation. There are also risks to borrowing from your 401 (k) plan.

 If your downpayment is only 5 percent, you usually must agree to buy private mortgage insurance. PMI isn't the same as the insurance you buy so your family can pay off the mortgage if you die. PMI protects only the bank it pays off your loan if you default. The premiums are added to your monthly mortgage payments.

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