What can I afford?
That’s the big question isn’t it? The big screen TV’s and the white picket fences come later. Right now, it all boils down to “How much can I really afford?” Buying a house is probably the biggest financial transaction you’ll ever make, so you want to make a wise decision. You don’t want to be living in a gated community, but eating off of card tables. How do you find that balance?
1. Go with what you’re comfortable with
If you already know how much you want to spend on your house payment each month, good for you!!! Some people have an idea of how much they are comfortable spending, but most experts suggest that your monthly payment should be somewhere between 20-30% of your gross monthly income. Before you get anybody else’s advice though, start with what makes you comfortable, even if it’s much less than you could qualify for. Leaving yourself some wiggle room in your finances is always a wise choice!
2. Figure out your DTI
You can use your Debt-to-Income ratio (DTI) to make sure you don’t get in over your head with your new house payment. Your Debt-to-Income ratio does exactly what the name says—it compares your existing monthly debt (including your proposed house payment) to your monthly gross income. What’s included in monthly debt? Things you’ll find on your credit report, Homeowners Association dues, child or spousal support, etc. Some things you won’t see? Ordinary, everyday expenses like groceries, cell phone bills, or utilities.
How does that help you? You want to make sure you don’t have too much money tied up in debt or you might not be able to keep up with your payments or live the quality of life you want once you actually get into your new home. Many loans will have a maximum allowable DTI. Usually, your maximum DTI is somewhere between 43% and 55%. If you get a USDA or conventional loan, it will fall on the lower end, while an FHA or VA loan will sometimes let you fall closer to 55%.
3. Keep these tips in mind.
For most of these calculations, your gross monthly income is used. That means your income before taxes, health insurance, 401k, etc. They also don’t include living expenses like groceries and utilities. You know how much you usually spend on those things, so you’ll be the best judge of how much to leave in the budget for them.
The Proposed House Payment used in a mortgage calculation will include real estate taxes, home owners insurance, etc. If you have less than a 20% down payment, you will typically have some sort of private mortgage insurance (PMI), as well. If you need more information on what goes into a monthly mortgage payment, click here.