KNOW HOW MUCH HOUSE YOU CAN AFFORD!

Published On: July 14, 2010

Having a realistic estimate of what you can afford to spend can save you time and stress during your house search. The Federal Housing Administration offers some pretty solid advice on this that you should consider. It recommends your monthly housing costs-including the mortgage principal and interest, plus other related costs like taxes, insurance, and maintenance fees or common charges-account for the following percentages of your gross, or pretax, monthly income.

  • No more than 29%, if you have debts your're paying off or other major monthly expenses, like childcare or school tuition.
  • Less than 41%, if you don't have other debt or monthly commitments (although some more conservative lenders recommend a maximum of 36%)

To figure out 29% of your gross monthly income, multiply your annual gross salary by 0.29, then divide by 12. If you make $50,000 annually before taxes, or about $4,167 per month, you'd want your total housing costs to come in around $1200.00 a month. That's about $500.00 less per month than the 41% ceiling.

As you calculate how much you're comfortable spending, bear in mind future expenses-if you have a baby, for example, or return to school-while you're still paying off your mortgage. It's nice to have a cushion.

ALSO; Add this to the bill:

Expect to pay some additional housing-related costs each month. Here's how it breaks down:

  • Private Mortgage Insurance/FHA Insurance. If you think you can only afford to put less than 20% down, you will likely have to get private mortgage insurance or PMI. Most lenders require this to protect them shoud you default on the loan, although you can usually cancel it once you've paid off 20% of the loan. PMI costs vary form one mortgage insurance firm to another depending on the amount of your loan, down payment, and your credit score. But expect to pay at least $50 to $100 a month extra.
  • Homeowner's Insurance. Count on paying at least $800 a year, or $67 a month for this. The average homeowners' premium was $804 in 2006, the most recent year available, according to the insurance information institute.
  • Property Taxes. You'll also be responsible for paying state and local taxes on your property, which can vary, so check the average for your area. The National Association of Home Builders has calculated average peoperty tax rates for every county in the nation, using data from the 2000 census.

Some new developments may have special tax abatements, which allow you to pay low annual taxes-from 5 to as many as 20 years. When you start looking for a home be sure to ask a realtor if there are any developments in the area that have tax abatements

  • Maintenance or Common Charges. If you join a homeowners association you may also be responsible for monthly maintenance or "common charges". (These can also vary so be sure to ask about them when you begin looking at places to buy)

Take a tax break! But wait it's not all bad news... As a homeowner, you can deduct some of these additional expenses. At the end of each year, your lender will send you a form listing how much you paid in mortgage interest and "points," for that year. You can generally deduct all of that. You should also be able to deduct the property taxes you pay to local and state governments. The IRS offers more information on tax deductions for homeowners.