Before You Buy, Know What Your Budget Can Handle
Buying a home is a major financial commitment, and we understand that your monthly mortgage payment will probably become one of your biggest regular expenses for years to come.
Before applying for financing with a lender, there is a big question: how much of your income can you comfortably spend on your mortgage? After all, you're not just purchasing a home. You still need to live in it. You need to cover groceries, utilities, transportation, insurance, healthcare, home maintenance, and other everyday expenses.
There is no single percentage that determines the suitable monthly mortgage payment for everyone. Your income matters, but so do your existing debts, regular expenses, savings, and the mortgage program you select. In this article, you’ll discover how to set a realistic homebuying budget and avoid taking on a monthly payment that leaves too little room for everything else.
Use the 28% Guideline as a Starting Point
The U.S. Bank notes that a commonly used rule of thumb is to keep your monthly housing costs at around 28% or less of your regular gross monthly income.
For instance, if your household earns $8,000 per month before taxes, 28% would be $2,240. However, the 28% figure is only a starting point. It’s not a universal mortgage requirement. Lenders in the USA may approve a higher or lower monthly mortgage payment depending on your overall financial situation.
Pay Attention to Your Debt-to-Income Ratio
Sometimes, borrowers think that lenders will evaluate their income to determine whether a borrower can afford a mortgage. However, a lender will also need to understand how much of that income already goes toward existing financial obligations.
The debt-to-income ratio or DTI compares your total monthly debt payments with your gross monthly income. Lenders use this ratio to evaluate a borrower’s ability to manage the mortgage payment along with their other debts.
For example, suppose you earn $7,000 per month before taxes. Your expected housing payment is $2,000, and you also have $400 in car payments and $300 in other qualifying monthly debt obligations. That gives you $2,700 in total monthly obligations and a DTI of about 38.6%.
You should understand that DTI limits may vary by lender, loan type, and underwriting method. For example, Fannie Mae sets different maximum DTI ratios for manually underwritten conventional loans and loans evaluated through Desktop Underwriter (DU).
Consider the Full Cost of Homeownership
Don't forget about the other costs that come with homeownership besides your mortgage payment.
For example, property taxes and homeowners insurance can add to your monthly housing expenses. Depending on your mortgage and property, you may also need to account for mortgage insurance or HOA fees.
Then there are expenses outside the mortgage itself. We mean utilities, maintenance, unexpected repairs, furniture, and future home improvements.
This is why, before choosing a mortgage amount, we recommend estimating what owning the property will actually cost you each month.
Don't Borrow the Maximum Automatically
Yes, a lender may approve you for a particular loan amount based on your income, debts, credit profile, assets, and the requirements of the loan program. But that doesn't necessarily mean borrowing the maximum amount is the right decision for you.
Imagine two borrowers earning the same salary. One has no car payment, significant savings, and relatively low monthly expenses. The other has a car payment, family expenses, and limited emergency savings.
This shows us that even if incomes are identical, the same mortgage payment may feel very different for each household.
We recommend you look at how much money remains after housing and debt payments. That amount still has to cover groceries, utilities, healthcare, childcare, repairs, and other everyday expenses.
Your future plans matter too, whether you want to grow your family, travel, save for retirement, or simply maintain a comfortable financial reserve.
Instead of asking only, “How much mortgage can I qualify for?”, think about what monthly payment will allow you to own a home and still feel comfortable with the rest of your finances.
Pick a Mortgage Program That Fits Your Situation
The type of mortgage program you choose can also influence your qualification requirements and monthly housing costs.
Conventional loans, FHA loans, VA loans, and other mortgage programs have different eligibility and underwriting requirements. Your credit profile, down payment, DTI, income structure, and property can all affect which mortgage options are available to you.
For example, some borrowers may consider an FHA loan, while other options may be better suited to a conventional or another type of mortgage.
You can also explore the broader range of mortgage programs available through LBC Mortgage before deciding which financing structure may work for your situation.
LBC Mortgage Can Help You Find the Right Loan
We strongly believe that determining how much of your income should go toward a mortgage involves more than applying one percentage to your monthly salary.
At LBC Mortgage, our mortgage professionals will review your income, your debts, credit profile, down payment, and homebuying goals to help you find suitable financing options.
If you're excited to buy your first home in the USA, move to another property, or explore different mortgage programs, we’ll help you make a more confident decision.