How Much of Your Pay Should Be for a Mortgage?
For many, buying a home for the first time is a huge step. In the 1950s and 60s, buyers were encouraged to purchase as much home as they could because prices would only go up. Unfortunately, that is no longer the case. You also can't rely on a real estate agent, mortgage loan officer or broker to help you decide how much home you can afford. It is going to be up to you to do your research and determine if you really can afford the house you want.
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Debt-to-Income Ratio
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When evaluating your ability to pay back your mortgage, a lender looks at your total mortgage expenses and compares it to your pretax income. For example, according to Bankrate.com, your monthly mortgage payment plus property taxes and homeowners insurance should not exceed 28 percent of your gross monthly income. So, if you make $50,000 a year and you multiply that by .28 (or 28 percent), you get $14,000. Divide the $14,000 by 12 months in the year, and your payment should not exceed $1,166 a month.
Evaluating Income
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While the bank might say that you can afford a payment of $1,166 a month, you might feel like that makes things a little too tight for you. According to Money Central's Liz Pulliam Weston, you need to do your own math before you purchase a home. Look at your income and evaluate whether you believe you'll have a steady increase over the years or if it could vary. "Most American workers have variable incomes," says Weston, "thanks to the prevalence of overtime pay and bonuses (and, these days, pay cuts and reduced hours)." You may want to consider basing your payment on the average amount of income you can expect each year.
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Evaluating Expenses
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If you like to take vacations, are planning to have a baby, are planning to start a new business or make any other significant life change, you need to work that into your future expenses. While you may make a steady income now, if you plan to continue an expensive hobby, like traveling, you may want to rethink spending all of your extra money on a new home. Further, if you are in a relationship and you intend to have children, consider how having one parent stay home or additional expenses like child care and other items will affect your overall budget.
Other Factors
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Those who are debt-free, except for the house, or who don't have to worry about retirement savings may be able to afford a more expensive home. Civil servants and those with good pensions may not have to worry about putting money away. Those who have no credit cards, student or auto loans, may also be able to afford more house. However, if the home you are purchasing is going to need a lot of work, you need to be sure that you can afford the payment each month and any remodeling you'll need to do.
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References
- Photo Credit Buy new house image by Fantasista from Fotolia.com
