A lot of thought and planning goes into determining the price range a person should look in when buying a home. A lot of people set a range with a minimum and maximum – the minimum being a base for expectations and the maximum capping him financially. Even still, having a maximum buying price does not mean you have to push it to the limit.
Assessing Your Income
The general rule of thumb is to follow the industry-wide standard for payment-to-income ratio. The amount you spend on your home each month is the total sum of the actual mortgage payment, property taxes, homeowners insurance, and any other applicable fees like mortgage insurance or homeowner’s association fees. That total should not equal more than 25 – 33% of your total household income.
Your income isn’t the only thing you need to take into consideration, too. You need to seriously assess your outstanding debts as well. Outstanding debt will make it more difficult for you to qualify for a mortgage, and that’s even more reason to lean more towards the 25% (or less) than the 33%. You’ll want to make sure you have enough money for your housing and your debts, no matter what emergency situations may arise. A good mortgage lender will apply a debt-to-income ratio and will not allow you to have a housing payment that is higher than your debt obligations.
The highest possible limit for a mortgage represents what you can afford in the best of times. Life isn’t perfect, though, and surprises do come along. Think about whether or not you’d be able to make your mortgage payments if you were in an accident or if you lost your job. What if your mortgage and bills had to be paid on one income instead of two (if you’re married and sharing debts with a spouse)?
Use a Mortgage Calculator
There are dozens of great mortgage calculators online. Take advantage of one – or even more than one – to assess your financial situation. Use this information before, during, and after the loan approval process.
At the end of the day, everyone wants to see you in the nicest home you can afford – realistically afford, that is. Take your time, have a real conversation with your real estate agent about your wants and needs, and remain realistic about your ability to pay for your dream home.