To buy the home that's right for you and your household, you may already have a dream home in mind. Then comes "what if we had a…..?" Reality sets in - you've got McMansion tastes on a starter home budget.
That's when it's time to face the question - how much home do you really need?
Nearly every buyer compromises on something. Maybe you get a fixer upper instead of a new home. Or, you buy a smaller home in a more expensive neighborhood. Or, you get a larger home in a suburb and compromise on the commute.
Here's a better way to set your shopping parameters. Ask yourself these questions:
- How long will you likely live in the home?
- How large is your household? Is it likely to grow?
- Where do you want to live - near work, near family, in a certain school district?
You should have a fairly good idea of the number of bedrooms, baths and living areas you want as well as other features you want your home to have. But the trick with buying a home is getting as much as you can on your wish list without becoming "house poor."
House poor means you can afford your house payments but you can't afford to do much else. That's why you should begin your search for a home with learning what you can comfortably afford.
Lenders have a conforming loan standard that they use as a benchmark for prequalifying you as a borrower. To qualify you, lenders use two ratios - income to mortgage debt, and income to total debt.
To qualify for a 30-year fixed rate conforming loan that is federally insured, your income to mortgage debt can be no higher than 29% of your gross annual income, and your debts plus mortgage payment can be no higher than 41% of your gross monthly income, according to FHA.com. (see: http://www.fha.com/debt_to_income_ratios.cfm. )
That means that if you make $3000 gross income per month, under a conforming loan standard, your house payment (principal, interest, insurance and taxes) should be no larger than $870.00.
If you're carrying credit card debt, student loans, or pay child support, the monthly debt service must be accounted for. To get the income- to-debt ratio, multiply your monthly income by 41%. If you make $3000, your total debt including your house payment can be no larger than $1,230.00. That means to qualify for a $870.00 house payment, your debt service can be no higher than $360 per month.
This formula is time-tested, and it's designed to help you minimize the risk of home buying by making sure you can afford your payments over time.
Once you know how much home you can afford, you'll find it much easier to decide how much home you really need, keeping in mind whether you'll need more space for the future. Having a price in mind will quickly sort out which neighborhoods are affordable, which homes are most suitable and most likely to serve your needs.
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