If you’re in the market for a new home, congratulations! It’s an exciting time in your life, and one of the major considerations is how much mortgage you can afford. There is more than one way to determine this important number, and you have a number of tools at your disposal to help you.

Gather your Financial Information

Your first step in determining mortgage affordability is to gather your financial information. Along with the income you have coming into your home, you’ll need to make a list of certain monthly housing costs and other expenses.

Housing Costs and Expenses

Housing costs you’ll need to pay every month to live in a home include the following:

• Mortgage Principal and Interest

• Utilities

• Property Taxes

• Homeowners Insurance

If, like many people, you have accumulated some debt, list your monthly payments as well. You’ll want to include items like the following:

• Car payments

• Minimum payments on your credit card accounts

• Student loan payments

• Lines of credit or other loan payments

Add up your monthly debts. This figure will be an important one when trying to figure out how much mortgage you want to take on.

How to Figure Out How Much Mortgage you can Afford

Now that you have a handle on your financial situation, look at how the numbers work in your situation.

Four Times your Gross Income Rule

To get a ballpark figure of how much house you can afford, add up the gross income (the amount you and your spouse make before your employer deducts anything for taxes) and multiply it by four. 

If you earn $35,000 per year and your spouse earns $30,000 per year, you have a combined gross income of $65,000 annually. Multiply this figure by four and you can afford a home in the $260,000 range. 

Total Debt Repayment Calculation Formula

Another way to figure out how much you can afford to pay for a mortgage is take the total amount of your monthly debts, and calculate how much of a chunk they are taking out of your gross income. Your total debt payments shouldn’t be higher than 36 percent of this amount. 

Using the same numbers as in the example above, if you and your spouse are making $65,000 per year, your gross monthly income will be $5,416. Using the total debt re-calculation formula of 36 percent or less, as long as your payments are no more than $1,950 each month, you should still be in good shape. 

Keep in mind that you still need to pay for housing, utilities, property taxes and homeowners insurance if you want to own a home. This figure obviously doesn’t cover expenses like food, clothing, transportation, childcare or savings. 

Online Mortgage Payment Calculator

To get a quick estimate of how much your mortgage payments would be when borrowing different amounts of money for a home, there are a number of websites offering amortization schedule calculators. The advantage to visiting one of these sites is that you can calculate the amount of a mortgage payment for different amounts of money, interest rates and amortization periods.

If you aren’t sure how much it would cost to borrow the amount of money you will need to finance the home you want, you can check out our home loans calculator anonymously and find out how much of your monthly payment will be allocated toward interest and how much will pay down the principal amount borrowed over time.

Lender Pre-Qualification

Once you get to the point where you are ready to jump into the market to look for a home, either make an appointment with a lender or fill out an online form to find out how much you can qualify to borrow. The lender will give you a certain figure representing the following:

• the maximum amount of mortgage money you will be able to finance;

• an estimated interest rate (keep in mind that this may change, which may affect the amount of your mortgage payments); and

• the amount you will need to pay in closing costs.

Your pre-qualification will be conditional on your being able to provide sufficient proof of income to be able to carry the mortgage to the lender. Discussing the figures with a lender in advance will help you understand exactly how much you will be paying for a mortgage if you decide to borrow the full amount the bank is prepared to lend. 

Before you choose to start shopping for a home at the top of your price range, keep in mind that simply because a lender “will” lend you a certain amount of funds, it doesn’t mean that you “should” borrow the entire amount. If your goal is to keep the focus on how much mortgage you can afford, keep in mind that every dollar you borrow has to be paid back -- with interest.