Your Retirement Center

Can You Buy?

Whether you can afford to buy depends on your income and your debts.

When you're thinking about buying a home, you have to take a hard look at your finances. The first question is whether you have enough cash for a down payment, traditionally 10% to 20% of the purchase price. The next is whether you'll be able to borrow the rest of what you need.


Being able to find a mortgage may depend on passing two qualifying tests:
Do you have enough regular income? Lenders usually require that you spend no more than 28% of your gross income on your mortgage, real estate taxes, and insurance.
QUALIFYING TEST 1 Lenders fear that if too much of your income is committed to housing, you face a greater risk of not making your mortgage payments on time.
for example
$ 7,000 Total monthly pretax income
x .28 Qualifying percentage
= $ 1,960 Monthly amount you can pay for housing
Some lenders will let you spend a larger percentage of your income on housing if you make a larger down payment. With a 20% down payment, it may be as much as 32%. There are also special programs, including those of the Federal Housing Administration (FHA) and Department of Veterans Affairs (VA) loans, which allow higher ratios.


How much do you owe on other debts? You can be turned down if your projected mortgage expenses plus other regular debt payments are more than 36% of your total income.
QUALIFYING TEST 2 Lenders want to make sure that you can keep up all your regular monthly payments — such as credit card and loan repayments — in addition to the mortgage. So they evaluate all your debts.
for example
$ 7,000 Total monthly pretax income
x .36 Qualifying percentage
= $ 2,520 Monthly amount of acceptable debt
If you have exceptionally large monthly expenses, such as high credit card interest or other outstanding debts, you may be turned down for a mortgage even if you have a high income.



The type of home you can afford to buy is directly influenced by the interest rate you'll be paying on your mortgage. For example, if rates are low and you're paying 6%, you could borrow $200,000 for 30 years and repay $1,199 a month. But if rates were 10%, as they have been in some years, it would cost almost that much — $1,097 — to borrow just $125,000 for 30 years. To find out how much you'll be able to borrow at current interest rates, you can use a loan and mortgage calculator. They're available online at many lending sites. Or you can buy a loan and mortgage payment table that lists the monthly mortgage payments for different loan amounts at various rates over a number of different terms. They're available in most bookstores.
WHAT YOU CAN AFFORD The following table shows the monthly payments you could expect to make on a 30-year, fixed-rate mortgage. Insurance and property taxes would add to this cost.
Home price Down payment Mortgage loan Monthly payment (including interest)
6% 8% 10%
$80,000 $8,000 $72,000 $432 $528 $632
$140,000 $15,000 $125,000 $749 $917 $1,097
$240,000 $40,000 $200,000 $1,199 $1,468 $1,755


Paying your mortgage isn't the only financial responsibility that's involved with owning your own home. Among the added expenses you may initially overlook — but will almost certainly encounter — are the costs of: Insurance. You'll need enough homeowner's insurance to cover the mortgage amount. The insurance company may insist that your coverage equal the home's full replacement value. Property taxes. Local school and property taxes vary enormously from place to place. Check before you buy to determine how much those costs will add to your housing bill. Commuting. Communities with convenient public transportation may cost more to live in, but can save you time and transportation expenses. Schools. Paying more for a home in an area with good public schools may be cheaper in the long run than paying for private school — especially if you have several children. And houses in strong school districts often resell more easily and at higher prices. Maintenance charges. Condominium and co-op charges for monthly expenses can escalate rapidly, so you should anticipate those costs in your purchase decision.


If the down payment and income requirements make owning a home seem out of the question, you may want to look for other ways to buy. There are some government-backed programs that make qualifying for a mortgage easier by reducing the amount you need upfront. You may also want to check:

  • Rent-to-buy option. You can sometimes arrange with an individual owner or developer to rent a home that's for sale, with your monthly payments counting toward the purchase price when you are able to buy.
  • Gifts. The FHA has introduced a variation on the traditional bridal registry, to encourage a couple's family and friends to put money aside for a down payment on a home bought with an FHA mortgage. It may not be a perfect solution, but it can be a good start toward eventual ownership.
  • Auctions. Home auctions, often designed to move property that hasn't sold or has been repossessed by a lender, often mean you can get a good price. If your bid is accepted, however, you may need to make a substantial down payment on the spot.
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