With low interest rates, there are many people that are looking at buying their first home. Rents are trending up and so it's a great time to look into buying. However, the question still remains – how much can I afford? What is the max I can spend and not feel house poor? One question I ask clients is "what are you comfortable spending on a house payment?" That usually answers a few questions for me.
I want clients to think about their housing expenses and all their other debt. When we calculate a house payment and figure your max payment, we may not consider all your debt. Unless you have a VA or USDA loan, we do not need to consider any daycare expenses. We also don't look at your utilities, clothing, groceries, etc. So if you have an expensive cell phone bill – or maybe a high cable bill, we are not adding that into our debt to income calculations. If you know you are going to buy a new car or have a baby, we don't take those expenses into consideration. We can adjust numbers for you and let you know what you should be spending given any changes coming up, but an underwriter will not know those items. Maybe you want to save money for a college fund or retirement – you need to consider those numbers when figuring the maximum you want to spend on your house payment.
The best way to figure out what you want to spend is to look through your current expenses. Look at your current rent payment, decide how much more you might be able to spend. Look at your expenses – keep a chart to figure out where your money is going. Are you spending a lot of money on non-essential items? Is there something you can cut back on? Look at your current bills- car payment, student loan payments and credit card payments – those are the items we are going to use when we figure your maximum house payment. Once you figure out what you are comfortable spending, then talk to your loan officer and decide how much you can really afford to buy.
You want to make sure you are comfortable with your house payment – you are the one making it, not the realtor or loan officer. Make sure you can afford the payment and still live! One more suggestion is to decide what you are comfortable spending and then save that much each month. So if you pay $800 in rent (or a current house payment) and you think you can afford to spend $1100/month, put away $300 each month into a savings account. If you find you are dipping into that fund for your everyday expenses, then maybe that is more than you can afford.
What happens if you think you can afford more than the lender thinks you can? That may be a good thing – there are many years of calculations that have gone into the debt to income ratios. If you feel you can spend more but we say no – we have the final say based on underwriting guidelines. If you have done your homework, you may find that the number your lender comes up with is higher than you expected or very close to what you expect. You do not want to be house poor – you want to be able to save money for emergencies and enjoy your life, not be tied to your house payment.
Decide what you are comfortable with and remember that as you are house hunting. It can be very easy to spend more, especially if your lender says you can qualify for more! With the low mortgage rates, it can be a great time to get into that home that you may have been dreaming about!
Leslie Vanderwerf, NMLS ID#335509, American Mortgage & Equity Consultants, Inc, AnEqual Housing Lender, NMLS#150953 - Email - Website
