When I talk to clients that are thinking about buying a home, one of my first questions to them is: "What are you comfortable with for a house payment?" The answer to that helps me know a little about them.
I want to know what they think they can afford – sometimes it is the same as their rent, sometimes it's more or less. Frequently, they are conservative and then it's not uncommon for them to have good credit and some money saved – not always, but sometimes! Other times I will get answers that aren't realistic, but once we talk about the cost of a home, that initial answer may change.
There are debt to income ratios that tell us what you will be able to qualify for. Ideally most FHA loans should have a housing ratio that is about 29-33% of your gross income, your total debt to income including your house payment should be about 41-43% of your gross income. However, sometimes there are compensating factors that allow us to qualify you for more of a payment – maybe even 50% of your income. Maybe you have a part time job that I can't use in qualifying, but you will have extra income. Maybe you have commission income or tip income that you don't have a long enough history of receiving. Maybe you have been paying rent that is similar to your current house payment. Or you may have a history of savings that shows you can make a larger payment.
Conventional loans will have different requirements depending on your credit and your down payment. If you require mortgage insurance, your maximum debt to income ratio will be between 41 and 45% of your gross income. Fannie Mae is limiting ratios to 45% although with a strong file, you may get an approval up to 50% of your gross income.
When lenders look at your debt, they include any installment loans (car payments, student loans), child support and all revolving debt, plus your house payment including taxes, insurance, mortgage insurance and any possible association dues. Usually anything reported on your credit report is included in the ratios. Things like utility bills (gas, electric, phones) and car insurance bills are not included. Because you will have more housing expenses (utility bills, etc) and other items – like food, clothes, insurance; you want to make sure you are comfortable with your house payment.
You will want to be able to save money for emergencies, vacations, clothing and maintenance, etc after paying your bills. That is part of the reason I ask the question – what are you comfortable with?! You are the one making the payment, not me – I want to know that you feel like you will be able to live and not be house poor. In most homebuyer classes, one suggestion is to make a budget and be realistic – will you be able to make your payments and have money to live on? Make sure you allow for home maintenance that you may not have had to pay for in the past. When you rent, typically the landlord is responsible for repairs – when the furnace quits or the stove stops working. When you own your home, you are the one responsible for the repairs.
Owning a home can be extremely exciting – I have clients that bought their first home just over a year ago, every so often they make comments about how excited they still are to own a home – even when they are cutting the grass or shoveling snow!! You just want to make sure you are comfortable with your payments to know that you can afford it and still enjoy it!!