This is a question that I get asked a lot – sometimes it's more of "how much can I qualify for?" Everyone is different and how much you can afford is sometimes different from what you can qualify for. You need to make sure you are comfortable making the house payment – just because you can qualify for more, doesn't always mean it's the right decision.
When we qualify you for a mortgage payment, we use a calculation called a debt to income ratio. The front ratio is simply the house payment into your gross income. Ideally the house payment should be about 28-32% of your gross income. Then we also take your total debt (house payment, car payments, student loans, child support and revolving debt) and calculate your total debt to income. That should be between 40-45% of your gross income. If you have a lot of debt, you will not qualify for as much of a house payment.
As far as what you can afford, you need to look at your total spending and decide how much you can spend on a monthly basis. Do you have a lot of other expenses that may not be in your debt to income ratio but would affect your ability to make the house payment? You don't want to be house poor – you want to be able to enjoy your new home.
Look at your hobbies and other things you spend your money on and decide what you can afford. If it's less than your loan officer says you can qualify for, make sure you keep that in mind when you are house hunting! If you are qualifying for the home on your own and you are married – maybe there is more income then we are using. If that is the case, maybe you can max out your house payment since you know you will have more household income.
If you know that you're going to have children or maybe buy a new car, you want to consider those additional costs when you are buying a home. Daycare expenses don't get used in qualifying unless you are using a VA mortgage and daycare is not cheap – so include that when you are budgeting your money. Take the time to make a budget showing what you are currently spending and decide what you are comfortable with in a house payment. It may be similar to what you are qualified for but it may also be totally different. Remember that you are the one making the house payment, not your loan officer or your realtor. Make sure you are comfortable with the house payment!
Leslie Vanderwerf, NMLS ID#335509, American Mortgage and Equity Consultants – Email – Website
