This is the question I get asked most by homebuyers – especially first time homebuyers. I usually turn it around a bit and ask them what they are comfortable with in a house payment. Then we talk about it!
The reality is I can qualify you based on your income and debt but that payment may be more than you want to pay. So we talk about your spending habits, what you may have for debt that I am not including – such as child care or maybe wanting to buy a new car. Just because you can qualify for a certain amount does not mean you should spend it. Some buyers know the maximum they want to spend monthly, others aren’t sure.
As a lender, I’m going to take your gross income and calculate a payment based on your debt. So if you look at your gross income, take 41-45% of that number, that is the maximum your debt can be at, then subtract your monthly payments for car loans, student loans and credit card payments – the balance is the max your house payment can be. Ideally you want your house payment to be about 29% of your gross income. So an example is if your income is $4000/month; 41% of that number is $1640. If you have $600/month in car payments, student loans and minimum payments on your credit cards, you will have $1040 left for a house pyament. That is less than the 29% recommended for a house payment, but the most you can spend based on your income and debt. There are programs that will allow you to go up to 45%, maybe even 50% of your gross income for your total debt.
Home Ready (a Fannie Mae program) and Home Possible (a Freddie Mac program) will allow up to 50% debt to income ratios if the automated underwriting program approves it. It will be based on your overall file, your credit, reserves, etc. FHA will also allow up to 50%, if the automated underwriting approves it. Usually FHA wants a maximum ratio at 41%.
As a homebuyer, you should look at your budget and decide what works best for you. Just because a lender says you can afford a specific number doesn’t mean it works for you. Maybe you have daycare or hobbies that take money – you don’t want to be house poor. Look at your budget, figure out what you spend on food, clothing, entertainment, insurance, etc. Then decide what you are comfortable with in a house payment. I frequently tell clients that they are making that house payment, I’m not – just because the calculations show they can afford something doesn’t mean they should spend that much. When you buy a home, you are usually getting a 30 year mortgage, not a 12 month lease. Remember that you are going to be there for many years and think about what you can afford.