Now that you’ve finally decided to make one of the most important purchases of your life—buying a home—it’s time to crunch those numbers. (Don’t worry, you don’t need to be a math whiz to do this).

While yes, there are mortgage calculators and other tools out there that easily calculate a budget number for you, that calculation is oversimplified and can’t give you an accurate picture of what you can really afford.

The majority of tools out there don’t take a detailed enough look at your real-life spending to be accurate. But don’t worry, that’s why we’re here! We’re going to walk through it together right now. So, get out that calculator (and maybe some coffee or tea), and let’s start adding up those figures the right way.

How to Calculate an Affordable Mortgage

Most mortgage budgeting calculators just take a percentage of your gross income (the amount of money you earn before taxes or other deductions), subtract major debts (like student loans and loan payments), and quickly calculate a mortgage payment.

The best way to figure out what you can afford is to take the time to really dig into your spending. That includes everything from your bigger expenses like daycare costs and car payments all the way down to your habitual coffee trips and Netflix subscription. Leave no stone unturned!

To make it a little easier, download our home buying budget worksheet to fill in as you read along below. Our list is pretty detailed, but you may have expenses that aren’t on the list–if so, be sure to add them!

Remember, it’s worth taking your time to be accurate with your expenses, because that’s how you can be sure the number you end up with is what you can afford.

Let’s get started!

1. Step one is pretty straightforward. Jot down your net income (that’s your paycheck after taxes and deductions—your take home pay) plus the net income of your co-buyer (if there's someone you'll be sharing the expenses with). There’s another line for additional income. That’s anything outside of your regular paycheck like income from rental properties, alimony, investment dividends, a side hustle … any money you earn that isn’t part of your paycheck. Add those lines together for your total monthly net income.
   
   

2. Monthly expenses are up next, and this is where we really get detailed. You want to factor in every expense. Pull up copies of your bank and credit card statements. You’ll want a few months’ worth. That way you have the facts about how you’re spending your money, no guessing involved.

   You’ll see the very first line item in this section is savings. We recommend that savings is the first place you put money when you get paid, though many people do it the opposite way—waiting to see what’s left at the end of the month to shift dollars into savings.

   Next up is a section for your current housing expenses. If you’re currently renting or maybe even living rent-free with parents, you’ll be putting $0 next to many of those lines. All that changes once you own your own home.
   
   

3. Once you’ve listed everything and done the math (or let the PDF do the math for you), you’ll have a budget number for what you can put toward your new monthly housing cost. The formula we use takes your income minus expenses, then adds anything you’re currently spending on housing back in (since that will be redirected into your new home).
   
   Monthly Net Income – Monthly Expenses + Current Housing Expenses = Available Home-Related Budget

4. Now that you know what you’re comfortable spending, it’s time to take a look at what that dream house is actually going to cost. Your soon-to-be new home comes with both one-time and ongoing expenses. The one-time expenses include things like a down payment, closing costs (fees paid at the closing of a real estate transaction), moving expenses, and more.

   The ongoing expense is mainly your mortgage payment, but that’s not all. For starters, the mortgage payment itself is more than just principal and interest on your loan. It may also include private mortgage insurance (PMI), and, if you choose to use an escrow account, it will wrap in your homeowner’s insurance and property taxes. If you choose not to go the escrow route, your mortgage payment will be smaller, but you’ll be responsible to pay those expenses on your own as they come due. For the purposes of the worksheet, enter those costs as monthly payments by dividing the annual cost by 12. 

   Estimating how much your new house will cost is a challenge because so many factors play a part. At this stage, you may want to start talking to a mortgage lender you trust (like us!) to help you estimate numbers that are accurate for the house and area you’re looking at. To give you a general idea though, here’s one look at what your mortgage costs could be on a $200,000 house:
   
        • $20,000 down payment (10%)
        • $885/mo principal and interest
        • $150/mo PMI
        • $167/mo property tax
        • $50/mo homeowner's insurance
   
   Beyond the mortgage payment, your new home comes with some brand-new costs. For example, if you didn’t have a yard before, and now you do, you’ll either need buy a lawnmower or pay for a lawn service.

   Remember back in the expenses section when some of the housing cost line items were $0? As a homeowner, all those costs are now yours. And don’t forget to budget for home maintenance. Things can, and will, get broken, stop working, or need to be upgraded. It’s important to set aside money every month to cover those expenses when they pop up.
   
   
   
   Struggling with this section? A mortgage consultant at GOLD can help (1-800-641-5036 or mortgages@GOLDcu.org).

5. The final section pulls in the numbers from all the other sections, then shows clearly how much you can afford to spend versus how much you are projecting your new home will cost.

   Fill in the amount of money you have saved to put towards the one-time costs.

   How do your numbers compare?
   
   

Next Steps: Getting Preapproved for a Mortgage

Now that you’ve figured out what works for your budget, you’ll need a mortgage lender you can trust (like GOLD) to take you through the preapproval process.

To make a credit decision, we’ll look at your income, assets, debts, and employment history. Now’s a good time to get together your proof of income—typically that’s your two most recent paystubs but could take another form. We will be pulling your credit report, which will be recorded as a hard inquiry, to complete the picture and determine the dollar amount you’re preapproved for.

Remember, what we look at when making a preapproval decision is way less detailed than the budgeting exercise you just went through. That means that the amount we approve you for will almost always be higher than the amount you worked out as comfortably affordable.

Both numbers are important, and we’ll help you figure out what your monthly budget, savings, and one-time expenses translate to in a home price. We want to get you into YOUR dream house that fits YOUR budget.

As your trusted partner, we’re here to help you from start to finish. At GOLD, you’re more than just a credit report and paystub. We’ll spend time with you to understand your goals and finances and guide you through each step of the process.

Have questions? Contact our experienced mortgage consultant for friendly and helpful answers. What’s your favorite way to get in touch? Fill out our contact form, send an email (mortgages@GOLDcu.org), or pick up the phone (1-800-641-5036).