How much home can you afford? There is a general rule of thumb that says your total monthly debt – mortgage payments, car payments, credit cards, gas, utilities, etc. – should not exceed 36 percent of your gross monthly income. Lenders typically follow a similar guideline when a qualifying a borrower for a mortgage, although the exact criteria depends on the lender, the borrower and the mortgage program.

 

First, let’s clarify what the lender actually does when qualifying a borrower for a mortgage. The lender qualifies a borrower for a maximum monthly payment that they can afford based on the borrower’s current financial situation, as well as the down payment amount. Remember, your monthly mortgage payment includes PITI – principle, interest, taxes and insurance. Many online mortgage calculators don’t include all four components.

 

Second, just because you qualify for a certain monthly payment, that doesn’t mean you should purchase a home that puts you right at that limit or anything close to it. “But wait,” you say. “I’ve crunched the numbers in my monthly budget and I have no doubt that I can swing that payment with plenty left to spare!”

 

Are you sure about that?
Do you plan to have kids? Will they go in daycare? If you plan to stay home with your kids, how much income will you lose? Will you start saving for their education? Do you plan to buy a car within the next five years? Would you like to go on vacation? Will this home you’ve fallen in love with require any improvements?

In other words, if these or other life events add significantly to your monthly expenses, will you still be able to swing that mortgage payment? Many first-time home buyers become house poor because they buy based on today and fail to consider where they’ll stand tomorrow. Their lifestyle tends to suffer, and they often struggle to meet their financial obligations. If an unexpected life change occurs, they could be in real trouble. On the other hand, if significant money will be coming off the books within a few years, you may determine that it’s worth it to make sacrifices in the short-term to own the kind of house you really want.

 

The Better Question to Ask
First-time buyers constantly come to us and say, “How much house can I afford?” Unfortunately, we can’t answer that question with any certainty. We can only tell you how much of a monthly payment you qualify for. The better question to ask is, “How much should I buy?” Again, the lender can’t answer that question. That’s a personal decision you have to make based on your income, lifestyle, family situation, and priorities, both now and in the future.

 

For a lot of first-time home buyers, mortgage qualification is a reality check. They experience payment shock when they come from paying low rent for a small apartment, or no rent from living with parents. Common sense tells us that upgrading to a home with more rooms, more square footage, and outside property will result in higher living expenses.

 

Resetting Expectations
You may find that you can’t afford the kind of home you want in the exact town you want. But you still have options. Would you be satisfied with a smaller house in the same town? Would you be satisfied with the same house in a different neighborhood or town where prices are lower?

Location is important. Location affects property taxes, home and auto insurance, commute times and expenses, traffic, social life, quality of schools, public services and more. Choosing how much home you can afford requires you to determine the importance of these and other factors.

In any of these scenarios, you have to look at how your decisions will affect your lifestyle. Would you be willing to compromise now and then move to a new home in the future? Is it best to live at home or rent for another year, save money, and look for ways to increase your income? Do you feel confident enough to pull the trigger right now on the home you really want, even if it’s a little more than you want to pay?

There is no mathematical formula that tells you exactly how much home you could afford. Greenway Mortgage will take the time to discuss these issues with you instead of simply approving you for a mortgage and wishing you luck.