Can You Afford this House?

houseWhen it comes to buying your first home, that question is not nearly as straightforward as you might think.

There are many so-called “golden rules” that determine how much house you can afford, and these are what your bank uses to decide whether or not to grant you a mortgage. Here are the two most prevalent rules:

1. Your monthly housing costs (mortgage principal+interest+property taxes+insurance) should not exceed 28% of your gross monthly income.

2. Your debt-to-income ratio should not exceed 36% of your gross monthly income, meaning that your monthly housing costs plus any other payments on debt you may have should equal more than 36% of your income.

The issue with the formulas that mortgage lenders use is that it doesn’t take into account many factors that go into whether or not you can truly afford a house, because they vary from person to person. In order to determine how expensive of a home you can afford, you need to look past the formulas and consider how the cost of owning that home will affect your life. Here are some things to consider:

1. Does your mortgage leave room for other costs of owning a home such as maintenance, utilities, etc.?

2. Will you have enough leftover income to cover any unanticipated home repairs or renovations?

3. Record your spending habits for a month. Will the mortgage amount allow you to continue with the same spending patterns, or will you have to cut back?

4. Are you anticipating any major life changes such as having children or sending a child to college that may affect your finances?

Look beyond what the banks think you can afford and make sure that owning a home will bring you joy, not just financial stress.

Many realtors and independent companies offer calculators to aid you in the process of deciding whether a mortgage is affordable for you or not. We like the one on the Valley Brokers website, as it offers many real estate loan and financial planning calculators to really help you understand how a mortgage will affect your life.

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