Home Buying – How much is too much?

Do you know how much house you can afford? Well, the very first step is having a working budget. Once you have a working budget, you can easily see where your money is going every month.

It is important for YOU to know how much you qualify for before you head to the bank. More often than not, the banks will quote you a “pre-qualification” dollar amount that is typically much higher than what you can actually afford. The reason for this is because the banks do not take into consideration your entire budget when drafting the loan. They only take into consideration your overall debt to income ratio.

So, let’s look a little closer – how much can you actually afford to buy?

To put it simply, the basic calculations most financial planners advise on is to stay below 36% overall debt to income, with typically no more than 28% of your gross income being a mortgage. This number allows you to account for your mortgage, as well as all the other expenses to run a household.

If your monthly gross income is $2500, that means that your maximum monthly payment should be no more than $700 a month. So, how much house can you afford for $700? That seems like a really small amount, right? In all reality, at $700 a month for a 30-year mortgage, with a fixed rate of 4.5%, you can afford a house of $138,000.

See how easy that was? If you went to a lender, however, they would tell you that you qualify for 43% of your overall income. Assuming you have no other debt, using the same rate at a 30-year mortgage, they would qualify you for $217,000. That’s an $1100 payment at $2500 gross income. Net income, you’re looking at about $2200 a month. That mortgage payment would be HALF your overall takehome pay. HALF. That’s a risky investment.

Remember, if you know what you want when you go to the lender, you can’t get talked into something more than you can afford. Stick to a debt to income ratio of under 36%, that means TOTAL debt, and you will keep yourself out of trouble.