How Much Home Can You Afford? Living by Grandma's Rule.

I am learning more everyday that my grandma is a very wise woman.  I remember when I fist moved out on my own her telling me, "Your rent and household bills should not be more than 1 weeks pay."  I did the math, and thought to myself, "I can't find a place cheap enough to live on one weeks pay."  So, I threw her advice out the window, and my apartment and bills were about two weeks pay.  I suppose I was able to survive because grandma had bought my car and was still paying my insurance.  Even with all her help, it didn't take long to figure out that I was living above my means.  I graduated college with credit card debt, but thankfully good ol' grandma put me through college so I was student loan free.  It took me a couple of years, but eventually I got all of my credit cards paid off and have not gone down that path again.  It did take me almost ten years though to learn that the advice grandma gave, is advice to live by.

Now that I am a REALTOR® I am always reminded of and counseling other on living within their means and sticking to grandma's rule.  One weeks pay would be approximately 25% of your gross income.  Remember gross income is the amount of money you make before taxes and deductions are taken.  Most lenders will say your monthly mortgage and household bills should be approximately 28% of your gross income.  All lenders formulas vary slightly, but this is a good rule of thumb.  To determine your monthly gross income, take all your regular monies that can be documented (undocumented sources cannot be included) this includes, your regular pay check, and unearned souces such has alimony, child support, and income producing assets such as real estate, stocks and bonds and even lottery payments.

Once you determine your monthly income, it's time to calculate your monthly debt (yikes!).  Include monthly debt obligations such as credit cards, installment payments,  child support, alimony, and any other personal debt you may owe.  Debt that will be paid off within six months does not have to be included.  Your total monthly housing expenses, including taxes and insurance, and monthly debt expenses should not be in excess of 36% of your total gross income.  If it is, your loan may not be approved or you may need to speak with your lender about all options available to you.  There are definitely options out there if you don't fit these guidelines, but you will live most comfortably if you do.  A larger down payment is a good way to buy a more expensive home and keep your monthly mortgage payment to a minimum.  Don't forget those pesky closing cost that are anywhere from 2-6% of your sales price.

I know it's difficult to live within our means.  It's something I struggle with constantly.  The neighbors house is always a little nicer, and my best friends clothes I always envy.  I truly believe we'll all be happier and achieve greater success if we continue to live by grandma's rule.  Set goals for yourself to do better within your career and when you can afford it, that one weeks pay will buy you a nicer  home than you're living in today.  But, for today, let's live within grandma's rule.

Aja Shroll

REALTOR®, GRI

ajashroll@gmail.com

214.669.2547