How much house can I afford?
Deciding how much house you can afford.
Deciding how much house you can afford should be one of the first questions you answer on the path to home ownership. While the lender decides how much you can borrow, in the end; you decide how much you can afford.
Only you understand the nuances of your lifestyle, income generating potential, and personal spending patterns. Are you planning for children or nearing retirement? Maybe you’re caring for a loved or have children starting college. Yes, there are many factors to consider, your location, current income, savings, personal preferences, and most importantly, the house-buying plan you have in place. How much you can afford will also involve some careful attention to how your financial profile may and will change in the upcoming years. With all this in mind, remember, your own peace of mind and security will matter most in the long run. How much house you can afford is as unique as you
The Mortgage
Your property investment will be an expensive purchase, so getting the finance right is absolutely vital. Fixed Rate, ARM, PMI, Taxes, it’s like learning a new language so don’t get caught off guard, do your homework. Lenders are careful, but they make qualification decisions based on averages and formulas. So, leave a little room for the unexpected – for all the new opportunities your home will give you to spend money, from furnishings, to landscaping, to repairs.
In traditional markets, you will usually only be allowed to borrow 80-90% of the appraised value and your down payment will have to cover the difference between that and the selling price. The appraised value may be higher or lower than the selling price of the house.
The Mortgage Formula
Historically, banks use a ratio called 28/36 to decide how much borrowers could borrow. An approved housing payment couldn’t be more than 28 percent of the buyer’s gross monthly income, and his or her total debt load, including car payments, student loans, and credit card payments, couldn’t be more than 36 percent. (In Canada lenders apply similar formulas to determine how much a buyer can afford. The Gross Debt Service ratio, or GDS, is not to exceed 32 percent of the buyer’s gross monthly income, and the Total Debt Service ratio, or TDS, is not to exceed 40 percent of the buyer’s total debt load.)
As home prices have risen, some lenders have responded by stretching these ratios to as high as 50 percent. No matter how expensive your market though, we urge you to think carefully before stretching your budget quite so much.