The St. Mary's Blog

If you’re preparing to purchase a home, congratulations – you’re about to take an exciting step! Many factors will shape your decisions over the coming weeks and months, and paying for your new house will be primary among them. Most homebuyers need a mortgage to finance their purchase, leaving you with an important question: how much mortgage can you afford? To determine how much you can (and should) borrow, St. Mary’s Credit Union takes a closer look at calculating the costs of homeownership.

The 28/36 Rule

Most of us have many recurring expenses in our budgets, from car payments to insurance, utilities, and more. That’s before groceries, gas and everyday living. Any existing debt, like student loans or credit card bills, must also be weighed against your income. How much will that leave for mortgage payments? To put everything in perspective, financial experts recommend the 28/36 rule.

According to this rule, you should spend no more than 28 percent of your gross monthly income on housing while no more than 36 percent of your gross monthly income should go toward debt. Imagine your gross monthly income is $5,000. That means you could afford a mortgage payment of about $1,400 each month per the rule. However, it also means that your total debt obligation each month should not exceed $1,800, which would include your new mortgage payment. This would leave you $400 every month to pay down your other debts, such as a car loan or credit card debt.

Using this rule enables future homeowners to determine the maximum mortgage payment they can afford each month and set a reasonable budget. Once you’ve done the math, if your debt percentage is too high, it might be a good idea to reduce your other debt payments before applying for a mortgage.

The Impact of Your Credit Score

Good credit is important to financial well-being, especially when buying a home. A strong FICO, or credit score, tells lenders you have a solid history of timely repayment and responsible financial management. Additionally, it indicates that your debt-to-income ratio is manageable. A good credit score can also lead to more favorable terms. Even a small reduction in the percentage of interest paid saves money over time.

Borrowers with a FICO score in the 700 or higher range are generally best positioned for a low interest rate. However, be sure to discuss your situation with your mortgage originator to learn more. If your credit needs work, a few simple steps can help, including:

• Develop a budget and debt repayment plan

• Pay down balances with the highest interest rates

• Consolidate high-interest debt at a lower interest rate

• Review your credit report and identify any errors – these may be able to be removed at your request

• Make all of your payments on time

• Avoid using credit cards or pay them off in full each month

Don’t Forget the Full Cost

Affording your mortgage isn’t just about monthly payments. You’ll also need to factor in home maintenance, taxes, homeowner’s insurance, and more. There are also closing costs, which include everything from setting up an escrow account for insurance and property taxes to your attorney’s fees and loan processing costs. On average, closing costs total 2 to 5 percent of the total cost of your mortgage.

Some buyers save on closing costs by negotiating with the seller. If the seller is willing to pay, you can avoid this added expense. However, in most cases you’ll need to include closing costs in the big picture of how much mortgage you can afford.

Learn More about Mortgages Today

With a clear picture of your budget and the costs associated with home loans, you can feel confident about how much you can borrow to buy a house. For more help, contact St. Mary’s Credit Union in Marlborough, Framingham, Hudson, Northborough, or Westborough, Massachusetts. It’s our mission to always be there for our members with trusted guidance every step of the way. To get started, apply online or contact one of our mortgage professionals to get preapproved today