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What can you afford when buying a house?

From A Guide for the New Jersey Homebuyer

Questions about what you can afford?

Generally, when a financial institution reviews a mortgage application, two basic guidelines are used to determine how large a mortgage to grant: 1) Principal, Interest, Taxes and Insurance (PITI) should not exceed 25-28% of gross income and 2) PITI plus other long-term debt should not exceed 33-36% of gross income. Refer to the mortgage calculator linked below to determine principal and interest. Long term debt includes car loans, installment loans, alimony, child support, and balances on charge cards that will take more than 10 months to pay off. The size of the down-payment you make will determine the mortgage amount that will be granted.

Mortgage Insurance

If you’re making a down-payment that is less than 20% of the home price, your lender may require mortgage insurance. Mortgage insurance is an insurance policy protecting the mortgage lender in the event that the borrower fails to make their mortgage payments resulting in default. This type of insurance does not protect the borrower. However, this may assist you in becoming a homeowner as opposed to saving the full 20% down-payment.

Budgeting

Budgeting is important when considering home-ownership! You, as the owner, will need to be able to cover any sudden house-related expenses that come up in addition to your regular monthly expenses. When creating your new monthly budget, remember to add the following new costs:
  • Property taxes and special assessments
  • Home/hazard insurance
  • Property maintenance
  • Association and membership fees (if applicable, for condominiums, townhouses and some developments). Some of the above listed fees will be included as part of your monthly mortgage payment, while others are not. Be sure to ask about how these fees are to be paid.
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