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How to Determine How Much to Spend on a House

How to Determine How Much to Spend on a House


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HomebuyersThe idea of becoming homebuyers and purchasing your first house is exciting. Chances are good that you have dreamed of what your house will look like and where it will be located. However, you probably haven’t thought as much about how to determine the right budget for a house or how to know that you will be able to afford the house that you buy.

There is nothing worse for homebuyers-turned-homeowners than to quickly realize that they spent more than they should have. Being “house poor” means that you are spending so much on your mortgage that you are not able to afford the other things that you want to do in life. Your house is consuming all of your money.

Use these tips for homebuyers to set a smart house budget before you hit the market in search of your dream home.

Think About Debt-to-Income Ratio

One of the best ways to establish a budget is to consider your debt-to-income ratio. To do this you need to add up all of your monthly payments for things you owe money for. This includes expenses like car payments, credit card payments, medical bills and student loans.

You then divide your total monthly debt by your total monthly income. The result is your debt-to-income ratio.

For example: You pay monthly $750 for your credit cards, student loans, and car payment. Your monthly income is $5,000. Your debt-to-income ratio is currently 15%.

Experts recommend that you try to keep your ratio at or below 36%. That means with your current debt and income you need to keep your mortgage payment, taxes and insurance each month to $1,050 to stay at the 36% debt-to-income ratio.

Keep an Eye on Changes

Anytime your debt or income changes, your ratio changes along with it. That means that if you just changed jobs and your new monthly income is $7,500, your house budget can increase while you still stay within your comfortable range.

It is important that homebuyers consider your lifestyle when determining a budget for your house. Your mortgage lender will approve you for a certain amount based on your income, credit, debt-to-income ratio and a few other factors. Just because they approve you for that amount does not mean that is the amount you should use as your housing budget.

If you like to go out to eat every night or like to take nice vacations every year, factor these things into your budget. If you like to build your savings account more than the average person and aren’t willing to drop what you contribute each month, take that into consideration as well.

Homebuyers will be unhappy if you spend the full amount you are approved for to then have to give up many of the things that you enjoy in life just to make your mortgage payment. Carefully look at all the facts and when it doubt, set a lower budget than you need to.

Start there and if you aren’t finding anything that you like you can slowly increase your budget, making sure you don’t go over the original budget you were comfortable spending.

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