Buying a House Series – #3 Tips on Finding Out How Much You Can Afford to Spend on Your Next Home

Before you starting looking for a home you will need to know what you can afford! Dreams and reality can collide when you truly figure out what you can afford to spend on a home. This “Buying a House Series” is made with years of experience on the best way to get your life in order so you can get a loan and find the home you want at the price you want. Use the following the tips below to make the process much smoother on you…

28/36 rule Can Be Very Helpful 

The rule of thumb is that you can purchase a home that costs about 2-3 times your annual salary. That is if you have normal bills though! So lets follow the 28/36 rule. The 28 is your monthly housing payments (mortgage, insurance, taxes).  These monthly expenses should not be more than 28% of your gross monthly income. So if your monthly gross income is $5,000 then multiply that by 28% and you know that you shouldn’t spend more than $1,400 on your monthly housing payments.

The 36 of the 28/36 rule is your debt to income ratio which is how much you owe compared to your income.  This ratio should be no more that 36%. So if you make $5,000 a month but spend $500 a month paying debts the ratio is 10% (500/5000).  Now add your new monthly housing payments to that and you get $1,900 in debt to $5,000 in income which is 38%. This would tell you buy a bit less house so that your get your ratio closer to 36% or to be precise, down from $1,400 monthly house payment to $1,300. That or pay off some of that debt!

Pick 2 Rule – Price, Quality, Location But Not All 3!

Now you know what you can spend so it’s time to figure out what you just have to have in your new home and what you may be willing to sacrifice. If you focus on getting just two of price, quality, or location you should be able to find the home you want. It’s always in your best interest to pick the best neighborhood for for resale value later but everyone has different core wants. You may pick a great neighborhood but be further from the city core. Maybe you can be in the city by in a smaller place. That’s up to you! The main thing is to stay optimistic, knowing that with enough searching you may find it all!

Especially at this point, if you haven’t already hired one, you’ll need a realtor! We suggest you have a realtor for the entire process so you can lean on their experience to help you every step of the way to your new home!

Buying a House Series Posts