Mar. 27, 2009
When my wife and I were looking to buy a house 10 years ago, we "consulted" an online calculator that promised to let us know what we could afford. It spit out a shocking number. The calculator told us we could spend way more on a home than we had thought. The lender we worked with a month later also approved us for a higher amount than we had anticipated, though not quite as lofty as the online calculator.
We didn't believe the online calculator or the lender. We stuck with our own number. It's a good thing. See, neither the calculator nor the lender asked us a few key questions about our lives or our plans for the future. Children, daycare, college savings, retirement savings … these expenses have a way of adding up. The calculator and lender also never asked about our approach to money, which is admittedly pretty conservative. We'd prefer to not live on the edge, financially speaking. That approach allows us to sleep better at night in our modest home than if we had borrowed every last penny someone was willing to lend us.
So how much can you afford? Let's start with a few rules of thumb. Many sources – and some lenders – use figures of 28% and 36% to determine how much debt you can handle. The 28% number refers to the percentage of your pretax income that can represent your mortgage costs (including principal, interest, taxes, and insurance), and the 36% number represents the upper limit for your total debt (mortgage, car payment, student loans, credit card balances, etc.). Some lenders may use slightly higher or lower debt ratios. These numbers are a good starting point, and they may work for your situation. But look a little deeper to make sure.
Is your career likely to become more lucrative in the coming years? Will your income dip while you go back to school? Plan to have kids, take big vacations or buy a vacation property? Think you might need to take care of an aging parent? Do you see a windfall in your near future? Any of these factors could play a part in what you truly can afford. Some might call for a little more restraint in your home purchase. Others may restrict what you can buy now even though you have good reason to expect that you will be able to afford more soon.
Keep in mind all the expenses that go with homeownership, including property taxes, insurance, maintenance and repairs. If you don't factor these into your budget, you can get behind quickly. Your Texas Realtor can help you estimate these expenses.
The point is this: Do some homework. Look closely at your finances. If you don't already, start tracking your expenses. Talk with family members to get their input. And visit with a Texas REALTOR®, who can help you match up your situation and goals with what's going on the market.
Sure, take a look at the online calculator. Just don't get too excited until you know if that amount is what you really can afford.
