How Much House Can You Afford?

July 9, 2019

Buying a house is one of the most important financial decisions you’ll likely ever make. It’s not something we do every day, or every few years like other big-ticket items such as cars, boats and RVs. In fact, a house is usually the biggest purchase you’ll make in your lifetime. Think about it, how often do you plunk down a third-to-a-half a million bucks for anything? 

If you’re house hunting this year,  evaluating school districts and considering locations that make for reasonable commute times and access to things like shopping, dining, recreation and neighborhood amenities, consider these suggestions to identify your true financial limits.

Getting Pre-Approved for a Loan

Before you start shopping for your new home, find out ALL the things you’ll have to pay for up front. You don’t want to become one of the dreaded “house-poor” home buyers, whose mortgage payments totally tap your monthly income. 

A mortgage lender may propose that you qualify for the highest loan amount possible (for your income) because their goal is not necessarily insure that you can comfortably make your mortgage payment. The more you borrow, the more interest you pay, which may not be in your best interests! Here’s the formula banks use to determine a loan approval amount – and while lenders vary, the factors like credit and debt-to-income ratio are fairly standard across the board.

The Mortgage Payment Ratio is what lenders use to calculate your maximum monthly mortgage payment and this rule-of-thumb recommends that a buyer should not exceed 28 percent of his/her/their gross monthly income. For example, if your total gross income is $100,000, your monthly mortgage payment should not exceed $2,300. (Mortgage Calculator)

The Debt-to-income Ratio (DTI) is another calculation lenders look at and prefer your debt-to-income ratio stay below 36 percent (although some lenders will go higher). Your debt includes your future mortgage payment, any car loans or student loans, and minimum credit card payments. So, if you earn a gross income of $100,000 a year, you shouldn’t be spending more than $3000/month on total debt.

New Home and Other Expenses

What banks don’t take into account when they come up with these 28/36 rules are things like closing costs that you have to come up with (three-to-five percent of a home’s value) – in addition to your 20 percent down payment. moving expenses, furniture you might need, and utility deposits. And don’t forget expenses like child care, landscaping and yard maintenance and utilities.

Banks also aren’t considering your spending habits (food, gas, entertainment, clothes, household supplies, transportation, etc.). Getting that magic “approved at” number is the first step. You still have some homework to do in the math department to figure out your comfort zone! 

Analyze your budget for the last three months and figure out all the fixed monthly expenses – then use a mortgage calculator to get your payments below 30 percent of your income – the amount Motley Fool recommends.

Is the monthly payment one you can comfortably make without stressing? Will you feel panicky juggling expenses and payments? Will your retirement suffer? Are you secure in your current income? Do you foresee any additional/substantial expenses in the near future (one to three years)? If you’re starting a family or planning to, there are some expenses you should factor in now, as well. 

The hardest but most important part of the “how much house can I afford” exercise is being honest about money going out and money coming in. At the end of the day, you want your new home mortgage to work for your budget, and not force your budget work for your mortgage!

Buying a House in Southshore

Most of the builders offering new homes in the master-planned community of Southshore, have affiliate mortgage lenders that can help you navigate the home-buying process! Explore Life at the Lake, a location convenient to dining, shopping and all kinds of recreation for the whole family. Tour the stunning model homes from Century Communities, Richmond American Homes and Toll Brothers,  available in ranch and two-story designs, and priced between the $400s and the $700s.