How to know what you can afford in a house payment

Written by Posted On Monday, 16 October 2017 06:00

Over the past 17 years I have seen too many home buyers over extend themselves when buying a home.  I see it from blue collar workers and I have even seen doctors do it.  So how do you know what you can afford when buying a home?  It doesn't matter whether you are buying a home in a subdivision or a SE Michigan lake home knowing what you can afford over time will help you.  Like so much of America..... status and what you have or show is sometimes taken as a person's success or wealth when that may not be true at all.  Just because somebody buys something on credit does not mean they can afford it.  The buyer of the 40' off shore cabin cruiser or the million dollar home may not have the reserves to hold onto the home when bad times come.  In our economy we have ups and downs such as business's closing, layoffs, and job transfers.  In life we have ups and downs such as health issues, children, and divorces.  These items sometimes affect our financial wealth and what we can hold on to.

So how do you figure a budget for your next home purchase?  Years ago they used to use 25% and 28% of your income for a home payment.  They look at the total debt ratio.  Usually the lenders and Fannie Mae likes it to be 43% of your income and sometimes they will allow it to be 50% of your income if you have high credit scores or cash reserves.  So if you make a combined total income (you and your spouse) of $120,000.   $120,000 divided by 12 months gives you a monthly income of $10,000.  So ideally you do not want your house payment to be more than 28% of your $10,000 monthly income which is $2,800 a month.  Remember this number will include property taxes, home owners association dues, and home owners insurance too.


  Let's say you have a car payment of $350, a truck payment of $500, and two credit card minimum payments of $350.  So add those four payments up and it is another $1200 a month in debt.  Add the $1200 to a $2800 house payment you would be under the guidelines of 43% of your income because the $1200 and $2800 add up to $4000 which is 40% of your monthly income.  So that should be a comfortable living according to the bank.  The bank or lender will usually qualify you for more than you should or want to go.

Remember it smart not to be house poor.  You do not want to live for your house.  You want to be able to go on vacations, save for college for the kids, go out to eat and enjoy life with out being buried in debt to a house.  You don't want a $4000 a month house payment because you have not other debt even if it is only 40% of your income.  But it is your right and priviledge to buy a house that big.  I want my clients to be able to afford their home in the good times and bad.  I would love for them to be able to save money even with their house payments.  

So if the bank will approve you for more money that you may comfortably afford what should you do?  How do you figure out what you can afford?  Do a budget is a good step to take.  Look at your current expenses.  If you are currently making a $1200 a month house payment and wish to upsize your house to a $2000 a month....That is an $800 a month increase.  Try living for 6 months without the extra $800.  Put it into a savings account each month.  You would have an extra $4800 to put down on the house.   Did living without the $800 a month stress you out?  Were you living paycheck to paycheck with out it?  Well then maybe you should lower your house payment so you have more flexible spending money.  You can do the same thing when renting.  Put the supposed increase in housing expenses in a savings account.  It will help you determine what you can truly afford. 

I hope this home buyer tip of How to know what you can afford in a house payment helps you make a sound decision when buying a home.  That is the goal.  As your realtor I hope to make your next home purchase a good financial move.

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