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Old 04-04-2010, 04:41 PM
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How do you determine how much house you can afford? When deciding how high you want to go when looking at real estate? How do you come up with the top number?

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Old 04-04-2010, 04:54 PM
Location: Salem, OR
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You need to get out a piece of paper and write down all of your debts. Generally speaking, you don't want your total debt to me more than 30% of your total income. You can go higher and many people go to 35% total debt to income, but personally I think it is a mistake to go higher than that.

So if you make $50k a year, then you can pay $15,000 a year towards debt. If you have a $200 car payment, then that leaves a month payment of around $1,000 to make a mortgage payment (PITI). This is around a $125,000 home. If you take the debt to income ratio up to 35% then that would be around a $150,000 home.

So, what you need to do is go and meet with a local mortgage broker. They will pull your credit and can tell you what you can afford.
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Old 04-04-2010, 04:54 PM
Location: NJ
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At it's very simplest, you need to figure out how much a month you can afford to pay for housing. So start with your paycheck. Now deduct all the expenses you need to pay (car,insurance,groceries,etc.). Don't forget to put something aside for savings. Now see how much money you have left. That needs to cover your mortgage, home insurance, PMI and any other house expenses. Now you can convert that amount in to a mortgage amount.
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Old 04-04-2010, 05:46 PM
Location: Richmond, VA
2,306 posts, read 1,557,081 times
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As Silverfall said...but I wanted to add something...

After you get the amount from a loan officer sit down and really think about what you are comfortable paying each and every month. When we went to buy our current home the bank told us they would lend us $525K. We did spend that amount but we had a $150K down payment making our mortgage something like $378K. There was NO WAY we could have afforded a mortgage of $525K. The bank thought we could but I just don't see how...We like to go out to eat, we like to see a movie every now and then...Things break in a home...we have had to replace the garage doors and the HVAC which was about $13K total in a month.
We have ants so we have a service company come out...$87 every 3 months. Trugreen for the grass $57 an application (way more for other treatments) A leak here, a smell there and a $300 or more plumbing bill.
Just something to think about. Meet with a lender and then evaluate how you like to live
Good luck! It's a very exciting time!
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Old 04-05-2010, 04:51 AM
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Real life worked for me. I am leasing, but prior to that I wrote down all my expenses, etc and compared it to my take home pay. I was pretty comfortable with what was left as discretionary income but let me tell you, real life day-to-day is a different story.

Between the time I moved and now, my son got his drivers license, a car and a new and improved social life! Hey....wait a minute, that wasn't on the list! His little part time job didn't make a dent.

If you have a few months, (even longer would be better) try actually putting away the difference between what you think you can afford and what you are currently paying. Live off what is left for a while and see how often you are forced to access the saved money. It was a real eye opener for me and now I know exactly what I can afford comfortably. Walk the walk for a while and you'll know your answer.

PS - The banks opinion of what you can afford is typically way more than the amount you should consider, unless of course they are willing to pay for those unexpected expense (like a new transmission) that wasn't on my list either!)
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Old 04-05-2010, 08:41 AM
Location: Marion, IN
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Hmmmmmm. I took the advice of a mortgage broker the first time I bought a house. They approved me for a much higher amount than I could actually afford. I struggled, badly.

The rule I follow is 1.5 times your gross annual salary is the most house someone should be buying. This leaves money left over for silly things like groceries.
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Old 04-05-2010, 10:37 AM
Location: Charlotte, NC
2,193 posts, read 4,641,789 times
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I wouldn't ask the bank how much you could afford. I would figure out the budget myself and a monthly payment I'm comfortable with.
Our payment (PITI) is around 25% of our net income. Obviously, you can go higher/lower based on your comfort level.
Also, a bank doesn't know your expenses. You may have daycare or an expensive hobby that they may not take into consideration.

Here's a calculator as starting point:
How much money can I borrow calculator
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Old 04-05-2010, 10:53 AM
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We had zero debt going into our first home purchase and the bank approved us for an astronomical amount... yeah, right. We sat down and created several Excel files, tracking our spending for each of several categories (cell phone, internet, gym, eating out, gifts, travel, tuition, gas, car maintenance, etc) for a few months. December was really shocking, mostly because we travel and buy so many gifts during that time. We also decided how much we wanted to set aside for savings each month, and then subtracted all of this from ONE person's income. (I am a student and don't yet have an income, but I will within a year--we didn't want to depend on that, though, in order to make our mortgage payments--so we based the budget on one income alone to be safe--anything extra will be extra payments down on our principal in the future, hopefully to the tune of $500 extra a month!)

In the end, I think we end up paying about 25% of our pre-tax household income for PITI, which is pretty damn good from what I've heard/read. We feel quite secure knowing that we have a sizeable back-up fund as well--we would not have any business buying a house without enough in savings to keep our mortgage afloat for at least a year if neither of us were working, in my opinion. Plus, you just never, ever know what kind of emergencies life is going to throw at you. We consider ourselves very lucky to be able to afford a house, period. It's not for everyone, and frankly, I don't think it should be. Too much uncertainty and risk involved.
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Old 04-05-2010, 11:25 AM
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You be realistic first, then do what everyone already suggested. I don't understand how people use all of what the lenders approve them for and then manage to actually live comfortably. It's as if common sense went out the door and personal greed took it's place.

We were approved $160k on one income, but knew that we would have to go much lower. We bought a home for $110k and our loan is $100k. It's a great little starter home (1800+ sqft) and has everything we need. Once I start working again, we'll be set up perfectly and if we run into problems, we'll still be able to afford what we bought.

If you are lower to middle income (usually up to 120% of the median income lvl for the county), try taking advantage of the Stabilization Programs that the cities are offering, it can make the difference in what house you get.
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Old 04-05-2010, 11:45 AM
Location: Boise, ID
8,047 posts, read 24,976,801 times
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Originally Posted by Racelady88 View Post
The rule I follow is 1.5 times your gross annual salary is the most house someone should be buying. This leaves money left over for silly things like groceries.
That is highly variable. We bought a house that was about 2.25 times my husband and my combined gross income (in a good year), and I qualified with just my income, so the house was more than 4 times my gross income. Of course, if you meant that 1.5 times your gross salary is how much LOAN someone should take on, rather than how much house they should buy, that is entirely different. Our loan was only about 1.75 our combined gross salary, still 3.5 times my salary though.

Because we had little other debt and are frugal people, we could easily have gone a bit higher, as high as 2x our combined annual salary would have still been no issue. Husband was even out of work for a full year and we were fine. So the x times gross annual salary rule depends highly on lifestyle and other debt.

It also depends on how much you are putting down. Obviously, if you are putting $100k down, you can probably afford $100k more house than if you are putting $0 down and financing 100%. Not only that, but if you are at least 20% down, and don't have to pay PMI, you can afford more house, as you aren't wasting that money.
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