For lenders, the standard “rule of thumb” is that an individual’s monthly housing payment (your mortgage, plus taxes, insurance, etc.) should be no more than 28 percent of your monthly income, before taxes. In cases like FHA loans, the debt-to-income ratio may be higher.
But how much should YOU borrow?
How Much Have You Saved?
First, the amount you’ve saved toward a down payment should be factored into your decision.
If your down payment equals 20 percent or more of the sales price of the home you want to buy, you can avoid carrying private mortgage insurance (PMI), which will reduce your monthly payment and make a significant difference in your total mortgage expense.
For example, if you’ve saved $20,000 for a down payment, purchasing a home that costs $100,000 instead of one that costs $110,000 means no PMI. (Private mortgage insurance is added to your monthly payment, and can cost anywhere from 0.25 percent to 2 percent of the outstanding loan balance, although 0.5 percent to 1 percent is more typical.)
In addition to avoiding PMI, the more money you can apply to a down payment, the less you will need to borrow and the more leverage you will have when shopping for the best loan terms. Lenders will view you as a better loan risk if you have more equity to invest in the property that is securing the loan.
How Is Your Debt?
If you already have a large student loan, or significant consumer debt, you should probably aim for a house payment that will be less than the 28 percent figure. This will give you a little more financial flexibility, in case something goes awry or an unexpected event negatively impacts your income.
Being able to qualify for a house payment that represents 28 percent or more of your monthly income doesn’t mean you need to take on that much debt.
How Much House Do You Need?
Instead of picking a price range based on what you can afford, consider how much house you need.
Think about your lifestyle and what encourages (or detracts from) your happiness. What does a house need to offer to improve the quality of your life? Select among homes that meet your lifestyle preferences and borrow only what you need to get the house you want.
Be a Mindful Borrower
You want to be a happy homeowner. Additional stresses, especially financial ones, will detract from your happiness. So, buy what you need, selecting a house that will optimize your life. Owning a home shouldn’t mean stretching beyond your means and making your life harder.
Borrowing less also means you will be able to make additional payments toward the loan as your income grows, or as you trim expenses. This can dramatically reduce your total financing expenses and the overall cost of your house.
Larry Mitchell, Post
Please note VA or Texas Veteran Loan programs do not require a down payment and many times the seller pays the borrowers closing cost. Call Larry Mitchell at 254 681 5115 Cell for more information.