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How Much Home Can You Afford?

Your expected monthly payments will greatly determine how much home you can realistically afford. Most of your payment will go toward loan principal and interest, also called P+I. However, your monthly payment is also likely to include amounts for property taxes and homeowner's insurance. Because of these extra payments, your monthly P+I payment is sometimes called your P+I+T+I payment.

If you plan on making a down payment that is less than 20% of the purchase price, you will also have to include provisions for private mortgage insurance (PMI). Lenders require PMI to insure against the higher risk of loan defaults that occur with loan-to-value (LTV) ratios greater than 80%. (An LTV of 80% is equal to a down payment of 20%.)

Loan-to-value ratio is a key factor in determining how much you can qualify for. To calculate, divide the mortgage loan amount by the fair market of the home value. If you have existing mortgage debt or are adding debt, divide the combined mortgage balance by the home value. For example, a mortgage loan of $150,000 on a home that is appraised at $200,000 has an LTV of 75%.

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