How to make sure you can afford your mortgage

By Michele Lerner
Mortgage Credit Problems Columnist

Before you buy a home, you need to qualify for a mortgage -- but beyond what the lender will let you borrow, you need to evaluate your budget for yourself and determine your own comfort level with a monthly payment. This could be less than you qualify for, but it will make it easier for you to keep up with the payments and avoid developing debt problems.

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How do think about whether a mortgage payment is too much? Follow these three steps.

  1. Develop a budget. Create an accurate record of your income and expenditures for the past year or two. You can do this by assembling your major bank statements, or you can track your money with personal finance software or applications such as Mint.com.
  2. Estimate a mortgage payment. Start with an estimated mortgage payment using a mortgage calculator. The main components include principal and interest, but add some amount for insurance and taxes as well.
  3. Figure out your debt-to-income ratio. Lenders compare your minimum monthly payments on all debt to your income, and you should do the same. Total your monthly payment on all debt -- that's your proposed mortgage payment, plus all other debt payments such as credit card payments, student loan payments, payments on medical bills, etc. -- and divide that by your gross monthly income. The maximum debt-to-income ratio varies from lender to lender, but traditional lenders prefer a debt-to-income ratio of no more than 36 percent. Some lenders will go up to 41 to 42 percent, and others may even go to a maximum of 50 percent for borrowers with good credit and cash in the bank. A lower ratio makes it easier for you to manage your payments after you've committed to your mortgage.

The key is not to rely on a lender's calculation of a comfortable debt-to-income ratio. Think about whether you can actually afford that mortgage payment, even if the lender says you qualify. For instance, do you have big recurring expenses coming up in your life, such as kids' college costs, that may put you closer to the edge? How secure is your job -- could you weather a few months of unemployment with this mortgage?

While all of these steps can help you buy a home, the most important step of all is to take a hard look at your finances and understanding what a commitment to your monthly mortgage payment means for your finances.

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