How Much You Can Afford to Spend on a Home: Conflicting Advice

How Much You Can Afford to Spend on a Home: Conflicting Advice

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 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. 

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 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.


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