How Much House Can You Really Afford?
Chances are, you've heard it before: Start your search for your next home with a clear idea of how much you can afford to spend. But how do you figure that out? Here are some guidelines:
I learned in the very beginning of my wonderful Real Estate career to use the 28/36 method of qualifying buyers.
The monthly payment cannot exceed 28% of your monthly income, and the total of all debt payments is limited to 36% of income.
Not everyone can afford the largest home they qualify for. You need to look carefully at your expenses and lifestyle to see whether you can and are willing to pay the maximum month after month. Families with high medical expenses, auto repair bills or educational costs, for example, may decide to take out a smaller mortgage rather than borrow the most they can.
Once you've established your basic price range, I recommend that you speak directly with a mortgage lender. You will ask what the monthly principal and interest payment would be for the loan amount you qualify for at the prevailing interest rate. They will run your credit report and discuss it with you and will also give you a letter stating that you are (pre) approved for a loan up to a specific amount. This letter will help me negotiate the best price for you since it is proof that you are a sincere and able purchaser.
Add in the monthly amounts for property taxes, homeowners insurance and homeowner association dues, if any. Estimate utility, credit-card and car payments. Add all these items to the monthly mortgage to get your total fixed expenses. Also figure in some routine maintenance costs. Subtract the total from your monthly income to get an idea of how much discretionary spending money you will have left at the end of the month in your new house.
Don't put all your money into the new house.
Plan to have several months' worth of income in a savings account for emergencies after you pay closing costs. Also, allow for new-home start-up costs such as new furniture and draperies, paint and wallpaper, new tools and equipment, etc.
Look into the crystal ball.
If you foresee a loss of income or a growth in family size, you may want to be more conservative in the amount you spend on a new house. On the other hand, if you expect your income to rise, enabling you to reach a comfort level after stretching your budget for a year or two, you may want to borrow the maximum.
Consider moving up to a bigger house in steps, rather than all at once.
After considering all the figures, you may decide to move to a better home, or your first home, now, even if it is not your dream home. In a few years, your dream home may be within a comfortable reach.
This Table shows how much 28% is at various income levels
Gross Monthly Income
Affordable Monthly Payment
*For incomes over $100,000, add together the two appropriate lines.
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