How Much House Can You Afford?

A home is one of the largest purchases you’ll ever make, and according to some, it’s one of the best investments.

But good investment or not, you shouldn’t get in over your head. In other words, don’t buy more house than you can afford.

Allocating too much income to a house payment can lead to being house poor. In which case, it only takes one financial hiccup to cause payment problems. These types of situations take the joy out of homeownership, hence the importance of buying a home within your means.

Blue Spot Home Loans takes several factors into consideration when determining affordability. This includes your income, assets and debt. Our goal isn’t just to get you the right loan, but also the most affordable loan.

How Much Should You Spend on a House?

The amount you’re able to spend on a house depends on different factors, with one important factor being your income.

Mortgage program requirements vary. But typically, most programs allow borrowers to spend up to 28% to 31% of their gross income on a house payment. Conventional home loans are typically around the 28% range, whereas FHA home loans typically allow up to 31%. This is known as the housing expense ratio.

To calculate this ratio, multiply your gross monthly income by 0.28 or 0.31. To illustrate, if you earn a monthly income of $5,000 and you’re applying for a conventional home loan, you’re able to spend up to $1,400 a month on your house payment (including principal, interest, private mortgage insurance, and homeowner’s insurance).

It is important to keep in mind that these housing ratio requirements represent general guidelines. It’s important to engage with a lender early in the home buying process so that you have a clear understanding of the mortgage amount for which you can qualify. By engaging directly with a loan officer, they can help you to better understand all of the mortgage options that are available, put together a game plan for your budget, and identify compensating factors, such as a large amount in savings, that may help you qualify for a higher debt ratio as an exception.

Additionally, it is important to keep in mind that when calculating affordability, lenders also calculate your total debt-to-income ratio (DTI). This is the percentage of your monthly income used to pay all your debts. It takes into account your combined monthly debt payments, including a future mortgage payment.

Typically, your total DTI cannot exceed 36% to 43%, depending on whether you have a conventional or an FHA home loan, respectively.

With that being said, the less debt you have the better. Owing other creditors could push your DTI too high, and if this is the case, you may need to apply for a smaller mortgage in order to qualify.

Benefits of Living Beneath Your Means

But, of course, spending less on a house isn’t a bad thing. In fact, it could be good for your finances. You might be tempted to spend your maximum budget on a home purchase. This can help you get a bigger home, but it might not leave a lot of wiggle room in your budget.

Remember, lenders only use information on your credit report when evaluating your DTI. Your credit report doesn’t list all of your monthly expenses, like what you pay for daycare, groceries, or insurance. So be realistic about your finances—less is sometimes more.

By spending less on housing you’ll have more disposable cash to increase your emergency savings or prepare for retirement. And with a bigger rainy day fund, it’ll be easier to survive financial setbacks. Extra cash can also go toward home improvement projects, travel, etc.

Let Blue Spot Home Loans Help

Getting a mortgage approval is one of the first steps toward stability and personal wealth. Contact one of our experienced loan experts to start the pre-approval process and get your rate. We’re happy to review different home loan programs with you, answer your questions, and narrow down the most affordable solution.

A pre-approval indicates that you’re a serious buyer. It also saves time because you’re able to narrow your search to properties within your budget. Give us a call today or fill out the contact us form to get started.