You’ve decided it’s time to buy a house, but when you ask yourself “How much house can I afford?” you’re at a loss. The next step is to determine your current monthly budget and how a house payment can fit into it. While your lender will ultimately tell you how much you can borrow for a home mortgage, it’s up to you to decide how much you can realistically afford on a month-to-month basis.
Lenders are careful, but mortgage qualifications are determined by math – formulas that into account hard numbers recorded on paper – and not the nuances of day-to-day life. Lenders won’t know much about your spending patterns unless it shows up on credit reports and won’t know anything about your lifestyle. You’re the only one who knows best how you handle your finances, so make sure you leave a little room for the unexpected. Purchasing a home opens up all new doors for spending money from purchasing appliances, furniture, landscaping, repairs… Home ownership is more financially than just the monthly mortgage payment, a fact that needs to be kept in consideration when choosing how much home you can afford.
Historically, banks use a ratio called the 28/36 ratio to decide your maximum borrowing amount. The approved monthly mortgage payment can’t cost more than 28 percent of your household’s monthly gross income at the time of borrowing. Your debt load, which includes car payments, all current loans (including student loans), and credit card payments – can’t be more than 36 percent of your monthly gross income. As home prices rise, some lenders may choose to stretch the lending ratio, sometime to as high as 50 percent. No matter how expensive homes become in your market, we strongly recommend that you think carefully before stretching your budget to that point.
Deciding how much you can afford is a personal decision, but a trusted lender can be a fantastic financial adviser to point you in the right direction. You should take into careful consideration your financial profile and how it could potentially change in the years ahead. Only you can make the decision of how much house you can afford while maintaining your own peace of mind and family’s financial security.
If you’d like to speak to one of our trusted lenders, contact us at 512.537.4977 or via email at info@RJFteam.com. We’d be happy to refer you to a lender who will look out for your best interest while guiding you through this huge financial decision.