Can You Afford a Mortgage Payment?

Mortgage rates are affordable and home prices are stabilizing, and you might say to yourself “now’s the perfect time to buy a home.” However, before you take the plunge, take a good look at your situation to determine if you can afford a mortgage payment. Fortunately, there are several tricks and tools to help you make the right decision.

1. Do you have a job security?

Truthfully speaking, there's no such thing as true job security. Anyone can lose their job without warning. Rather, you’ll need to consider whether your job is stable. Buying a home is a major decision. It takes anywhere from 15 to 30 years to pay off a mortgage loan, and once you sign the mortgage documents at closing, it's a done deal. You need to be honest with yourself and determine whether your job provides the income you need. If you're an employee earning the same amount each week or month, it shouldn't be hard to determine whether your job can support a home loan. But if you're self-employed or a commission-based employee, your income can fluctuate, which makes it harder to know whether you can manage a mortgage payment. Not that you can't buy a home if self-employed or earning commission, but you need a cushion. In other words, don't apply for a home loan if you're just getting by with the clients you have. Since you can lose a client and experience a sudden drop in income, you might maintain one or two extra clients, just in case. This way, if you lose a percentage of monthly income, your income may still be enough to maintain a mortgage payment.

2. Do the math yourself

A simple calculation can help you determine if you can afford a mortgage payment. To get approved for a home loan, your mortgage payment cannot exceed 28 percent of your gross income. This includes principal, interest, taxes and insurance. For a rough estimate of how much you can afford, take your gross monthly income and divide this figure by 28 percent. For example, if you’re earning $2,000 a month, the most you can afford to spend on a mortgage payment is $560 a month.

3. Take other expenses into consideration

The above calculation is just a guide. Although mortgage lenders will approve a home loan up to 28 percent of your gross income, you need to take other monthly expenses into consideration to decide how much you can actually afford. To illustrate, someone who doesn't have a car payment, childcare expenses or high healthcare costs might comfortably afford a mortgage at the 28 percent maximum. However, if you have other expenses that take a chunk of your income, 28 percent might be a stretch. Write down all monthly expenses, and then subtract these expenses from your income. After this assessment, you may conclude it’s safer to stick with a mortgage that's no more than 25 percent of your gross income.

4. Do you have an emergency savings?

You can have good credit and stable income, but unexpected expenses are going to occur. And sometimes, these surprises make it difficult to pay your home loan. Defaulting on the mortgage is the last thing you want to do. This can hurt your credit score, and many lenders start the pre-foreclosure process after 90 days. Before buying a house, make sure you have a cash reserve on hand. These are funds available in your savings account after paying the downpayment and closing costs. Aim for a three-to-six month cash reserve. Knowing whether you can afford a mortgage payment is tricky. Buying a home is an expensive transaction, and you have to take other expenses into consideration, such as utilities and maintenance. If you're committed to buying a house, the best way to know if you can afford a mortgage payment is to get pre-approved by a lender. After a review of your income and credit, the bank provides a pretty good estimate of how much you can afford.