When you are initially looking to purchase a home, you often wonder how much you can afford.
You don’t want to buy a home and then be strapped for cash every month because
your housing costs are more than you were expecting. (That’s called being
“house poor,” by the way.) Before you look at any houses, you’ll want to know
what price range you can afford and then find homes that fit that description.
Many individuals do research before looking at houses to see financially how much they should be
spending. Some people want a blanket statement on the correct percentage of
your monthly income you should be paying toward a mortgage and other housing
related costs. Unfortunately, there isn’t just one overarching percentage that tells
you how much you should spend on a house each month.
Type the search query “How much should I spend on a home?” into your favorite search engine,
and you’ll get thousands of answers. The only problem is that each answer is
different. Obviously you want to make sure your mortgage payment isn’t more
than your monthly earnings, but as to what exact percentage of your paycheck
that mortgage payment should be, it’s fairly arbitrary. Some experts say your
mortgage payment should be 30% of your income. Others say 45%.
Why is there
such conflicting advice on how much you should spend on a home?
It’s because
there isn’t one overall correct answer. How much you can afford on a home is
all about your personal preferences and your personal budget.
For example, a
conservative economist would urge you to keep your mortgage payment below 25%
of your monthly income. Economists who want you to stay as far away from debt
as possible will always tell you the lower the mortgage payment, the
better. This advice, while valid and
helpful for saving money and getting out of debt, may make it so you’re
strapped into a home that’s too small for your needs. These economists will
also have you opt for a shorter loan time (say 15 years rather than 30) so you’ll
pay your loan off faster. Of course, this means that you’ll qualify for less
money on your loan.
On the
other end of the spectrum, your bank will advise you to plan for 30 to 45% of
your monthly earnings for a mortgage. The world (and housing bubble) is
resurfacing from the recession where individuals had to pay 20% of the home’s
value as a down payment and have excellent credit to even think about
qualifying for a loan. Now banks are lending again and at much lower prices, some
even at 3.5% of the home’s value for a down payment. Remember, a bank is a
business. It makes money by lending you money, and you paying interest on that
money. If you’re trustworthy and have average credit, they’ll want you purchase
a home (and loan) for as much as you can and not a penny less.
According to the
Wall Street Journal, a good blanket percentage that many economists use is the
28/36 rule. That means your housing costs should take up no more than 28% of
your monthly income, and your housing costs plus your other debts (utilities,
car payments, phone payments, student loans) shouldn’t be more than 36% of your
monthly income.
So, assume you are
paid $8,000 a month. Your housing costs should be less than $2,240,
($8,000*0.28= $2,240). Your housing costs and the rest of your bills should be
less than $2,880. ($8,000*0.36= $2,880).
So is the 28/36
rule the correct answer? Unfortunately, there isn’t one correct answer. It’s
all up to you and your budget, how much debt you feel comfortable being in and
how much debt you currently have. Luckily, Landmark Home Warranty has a
step-by-step explanation on how you can take your budget and use it to find out
what you personally can afford for a home.
Or, you can find out what exactly makes up your home costs here: