Most lenders follow the "28-36" rule in deciding how much they will let you borrow for your new home.
What does these mean. Lets break it down into simple terms.
"28" - First you must have good credit. Once the bank has determined your credit is good they will most likely issue you a mortgage or home equity loan if your monthly housing costs will be no more than 28% of your monthly income. Monthly housing costs include your loan payment, property tax and home owners and/or flood insurance premiums.
"36" - Most lenders will require that your total monthly payments for housing and all other debts, such as credit cards, car loans, student loans, etc add up to no more than 36 % of your gross monthly income.
As an example: If your total gross earnings per month is $4,000, your housing expenses should not exceed $1,120 per month. Your total monthly payments for housing and all other loans should not exceed $1440 per month.
Before you decide to buy a home, sit down and make a list of everything you pay for each month. If you stop for coffee at $2.00 a cup every morning, you should write this down. These little things add up. Also remember to pay yourself every month. You should be putting something into savings every month for unexpected expenses, vacations, etc. If your mortgage payment is too high to put a little something away each month, you have spent too much for your home.
Remember, just because the bank says you can afford to borrow a certain amount does not mean you can truly afford it. They do not take into consideration the day to day expenses we incur such as gas for our cars, day care, food. You are the only one who can decide what you truly can afford to spend on your new home.
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