Deciding How Much House You Can Afford

Your lender decides how much money you can borrow, but you decide what you can afford.

Lenders are careful, but they make qualification decisions based on averages and formulas. They won’t understand the nuances of your lifestyle and spending patterns quite as well as you do. So, it’s wise to leave a little room for the unexpected. Your new home will give you many opportunities to spend money on things like furnishings, landscaping, and repairs.

Historically, banks use a ratio called 28/36 to decide how much borrowers could borrow. An approved housing payment couldn’t be more than 28 percent of the buyer’s gross monthly income. A buyer’s total debt load (including car payments, student loans, and credit card payments) couldn’t be more than 36 percent of his or her gross monthly income. As home prices have risen, some lenders have responded by stretching these ratios to as high as 50 percent. No matter how expensive your market, we urge you to think carefully before stretching your budget quite so much.

Deciding how much you can afford should include 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.