You’ve heard the phrase, “don’t buy more house than you can afford.” However, this piece of wisdom is incomplete. It’s not just about how much house you can afford, but how much house you should afford. It’s obvious that you should only buy a house with a price that fits your income. But, your income is not the only consideration. Read on for advice on how to figure out how much house you should afford.
Figure Out How Much You Can Afford
Before you know how much you should spend on a house, you have to know how much you can spend. Most lenders allow for a debt-to-income ratio of no more than 36%. This means that your debt payments each month should be no more than 36% of your income. Also remember to factor in the length of your mortgage, the cost of homeowner’s insurance, and planned savings such as retirement.
A down payment on a house should be at least 20% of its purchase price. If you decide to put down less, keep in mind that you may have to pay for private mortgage insurance.
Figure Out How Much You Spend
The next step in this process is to figure out your personal spending habits. Regardless of your income, how do you spend your money? Are you a frugal person who pays bills but not much more than that? Are you a party-lover who enjoys eating out at fine restaurants and buying cutting-edge technology?
Keep a meticulous record of what you spend and where for at least a few months. You can do this on paper, or enlist the help of a smartphone app.
Figure Out How Much You Should Afford
Once you’ve identified your spending habits, you can account for them when deciding how much house to buy. If you have liberal spending habits, then you should not buy a house at as high of a price as your income suggests. Alternatively, if you make less money but spend conservatively, you’ll be able to buy more house than you thought.
Set Some Goals
Now that you know the amount you’re prepared to spend, you can set goals to organize your finances. Make a goal for how much you need to save for a down payment and by what date. It’s also a good idea to spend a little less on your house than what your final estimate suggests. This way you’ll never end up with more house than you can pay for.
For help with finding houses in your price range, give us a call today to schedule a showing!