How Much You Should Spend on Your Home

9085229_sKnowing how much house you can afford makes shopping for a new home so much more fun and effective.  There is nothing worse than falling in love with a new home only to be told by the lender its out of your price range.

That’s why I always send my clients to get pre – qualified first.  Its quick and easy and once you have the pre -qualified letter in your hand you know exactly how much house you can afford.  When it comes time to make an offer I include the pre-qualified (or even better, a pre-approved) letter with the contract so the seller feels confident accepting the offer.  It’s a win-win for everyone.

First Step

My clients don’t share their finances with me.  That’s between you and your lender. But I can give you some tools for a quick do-it-yourself look at where you stand in terms of getting a mortgage.

Calculate Your Debt-to-Income Ratio

First step is to calculate your Debt-to-Income ration.  This is the ratio lenders use most frequently in determining how much you can borrow.  This is the percent of your income that goes toward paying your debt.  It’s your personal debt like credit cards, car loans, and student loans plus your new mortgage payment.  The ratio is expressed as a percent of how much of your income is being used to each month to pay your debt payments.

Typically 36% or less is considered a healthy debt limit.  This is your income before taxes and other expenses are taken out.  If you are married and will be applying for the loan together you add both incomes into the equation. Then take this number and multiply it by 0.36.

For example, if you and your spouse have a combined gross monthly income of $8,000:

 $8,000 x 0.36 = $2,880

This means your total monthly debt, including your new mortgage, should be no more than $2,880.

Next you need to determine your total debt without your mortgage payment. This includes bills like credit cards and car loans.  Let’s say your monthly payments total $900.

Computing the maximum mortgage payment would look like this:

$2,880 – $900 = $1,980

Now we have determined that the most home you can reasonably afford has a mortgage payment of $1,980, which would include property taxes, insurance and possibly mortgage insurance and (HOA) Home Owners Association fees.

Only a Guideline

Please remember that this is only a upper-limit guideline. Many of my clients find this to be very helpful information but ultimately decide it’s a debt load too high for them to comfortably carry.  I applaud that kind of thinking. Use these figures as a top limit when shopping for a home so you are concentrating on homes within a price range that is comfortable to YOU.

Do you have a question you want answered related to real estate or home ownership?  Feel free to call me at 303-579-1617.

I am a Boulder County real estate specialist. Over the past three years, I have earned the distinction of being named a 5280 Five Star Realtor. This puts me in the top 7% of all Realtors in the Denver Metro Area for customer satisfaction. If you would like to schedule a buyer or seller meeting with me, please feel free to call me at 303-579-1617 or contact me by email.

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