How to Know How Much You Can Afford when Buying a Property

There are 2 items that go into knowing the right property value range you should focus on for your household:

  1. The down payment needed to avoid PMI and secure a reasonable monthly payment
  2. The monthly payment you will have to pay.

You can see that they are related.  Your mortgage broker may say you are approved to borrow up to a high number, but that RARELY the right amount to borrow, because it rarely makes sense both from a down payment and monthly payment perspective.

Let’s do an example. Say you find your dream house and it’s worth $500k.  Your mortgage broker says you are approved for a mortgage up to $450k and you have $50k of savings.  That all seems to work, but you have to do the full math to make sure as shown below:

Buying a Property Amount
House Value $500,000
Down Payment $50,000
Mortgage (3% for 30 yrs) $450,000
Principal & Interest $1,897
Escrow estimate $410
PMI estimate $250
All in Total Housing $2,557

You can afford the down payment and you’ve been approved for the mortgage, but a housing payment of $2557/month is too much for your cash flow.  What if you can only handle a $1800/month housing payment? You would need to wait, and save more to be able to put down 20% ($100k in this case) and avoid PMI. With a larger down payment, your monthly payment would also be significantly less. 

Here you can see that you need to balance down payments AND monthly payments to make sure you do not jeopardize your household financial wellbeing by being “house poor” and not being able to do anything else all month because you have to pay the mortgage. Remember, when you buy a property you need to balance both.