How Much House Can You Afford?
House poor is a term that many of us have heard of, but what does it mean? A person who is house poor is someone who can afford his or her home mortgage payments but can’t afford much of anything else. When this happens discretionary spending on restaurants, furnishings, travel and clothes are severely cut back, due to a large proportion of his or her income going towards the mortgage payments, upkeep costs, and energy/utility bills.
While the idea of purchasing an expensive home can be appealing once done, you might not feel the same way. After all, you don’t want to find yourself stuck at home while your friends are out having fun. Buying more home than you can afford comfortably will place serious restraints on your financial life. This doesn’t sound like fun, does it?
Sure, you want a nice home. But you also want to make sure that it fits in the landscape of the rest of your life. Afterall,
Here is what you need to keep in mind when finding dream house that you can reasonably afford.
Consider Your Ratios
A Backend Ratio
Your debt-to-income ratio is your back-end ratio. This ratio can be found by
adding all of your monthly debt payments, including your car payments, loans,
credit card payments and any other outstanding debt, then dividing this number
by your gross monthly income, which is the amount earned before taxes or other
deductions. It is vital to know this ratio because the higher your back-end
ratio is, the more difficult it is to meet your monthly mortgage payments.
Lenders will also have maximum caps on this. The absolute highest back-end
ratio you can have and still qualify for an FHA mortgage is 43%.
A Front-End Ratio
A front-end ratio is also known as the mortgage-to-income ratio. You can find
this ratio by using a debt to income calculator or simply by dividing your
projected monthly mortgage payments by your gross monthly income. For example,
if your monthly mortgage payment would be $1,500 and your monthly income is
$6,000, your front-end ratio would be 1500/6000 or 25%. This projected mortgage
payment should include the principal, taxes, insurance, and interest payments.
Many lenders have limits on the maximum front-end ratio that they’ll permit. If
you’re seeking an FHA loan, the federal cap on front-end ratios is a 31%
percent limit.
Remember That Life Changes
Are you starting a new career? Returning to graduate school? Do you plan on
growing your family? If you don’t expect any big changes to your life or
finances, then you may be able to afford a larger mortgage payment. If you do
have life plans that will impact your finances in the near future, it may be
best to secure a more manageable mortgage payment.
Also, job security is critical when deciding how much home you can afford. How long have you been working? Do you suspect any major upheavals in the company anytime soon? Have there been any major layoffs?
You never know what the future holds, in order to figure out exactly what you can afford it is important that you make sure that you have an emergency fund. One that can cover all of your necessary expenses while you get back on your feet. An emergency fund should cover at least three to six months of your living expenses.