How much house can you afford?
First, a few myths about buying:
1. “My Credit isn’t good enough.” Fact: Your credit score can be as low as 580.
2. “I haven’t been at my job long enough.” Fact: You can buy as soon as your first paycheck.
3. “I don’t have enough money to put down.” Fact: It can be as low as 3% down
Now, the facts:
A mortgage lender decides how much money you can borrow, not how much home you can afford.
Lenders make qualification decisions based on averages and formulas. Only you know the nuances of your lifestyle and spending patterns. It’s a good idea to leave room for the unexpected, after all your new home will give you plenty of opportunities to spend money, from furnishings, to landscaping, to repairs.
Banks typically use a ratio called 28/36 to decide how much borrowers can borrow. An approved housing payment can’t be more than 28 percent of the buyer’s gross monthly income, and his or her total debt load, including car payments, student loans, and credit card payments, can’t be more than 36 percent. Some lenders have responded to rising home prices by stretching these ratios to as high as 50 percent. We urge you to think carefully before stretching your budget quite so much.
Deciding how much you can afford should involve some careful attention to how your financial profile will change in the upcoming years. In the long run, your own peace of mind and security will matter most.