*Author’s Note: Jack Meyers // Meyers Real Estate Group is a Real Estate Firm licensed in the state of Colorado. The content contained in this article is for informational purposes only, and is not intended to serve as expert financial or mortgage lending advice. For specific information pertaining to your individual financial situation, seek the help of a qualified financial planner or mortgage lender.
So you’re dreaming of a beautiful home, huh? Spring is right around the corner, and this time of year the market tends to heat up with Buyers seeking their first, or next, dream home. Before you decide to park in your 3-car garage, ponder what kind of dog should live inside your white picket fence, or wonder how many party guests will fit in your chic downtown condo, start by figuring out how much house you can really afford.
FAQs — How Much House Can I Afford?
First, know this: a mortgage calculator or formula may suggest you can afford more house than you thought based on your income, but income alone isn’t enough to determine how much house you can actually afford.
A stable mortgage, also known as a Qualified Mortgage, will only allow you to carry monthly debt obligations (including your mortgage) at a maximum of 43% of your gross monthly income. That figure is known as DTI, or your Debt to Income Ratio; anything over 40% is considered high, and marks you as more of a risk for potential lenders. Just because you find an online mortgage calculator willing to give you the moon, doesn’t mean you can afford to live there. Student loans, car debt, credit cards, and other recurring monthly debts all contribute to your DTI, and no matter how much money you gross each month, this ratio will impact how much you can actually borrow for a Qualified Mortgage.
Some of the best personal math you can do, is the variety that includes all potential expenses. When you are considering how much of a house payment makes sense for your situation, factor in your total likely housing expense, not just the principle + interest: maintenance and repairs, utilities, taxes, and insurance. Thinking in these terms may lead you to buy less house, but you’ll also be left in a more secure financial position, and maybe a little more freedom to enjoy life outside your home.
If you’ve been renting for awhile, you may be unsure what to estimate for home maintenance. After all, the age, current condition, and location of your home will all affect your home maintenance costs. A good rule of thumb is to plan for 1% of the value of your home in annual maintenance costs. These costs will not happen on a monthly basis, and you may go many months, or even years, without issues — then suddenly need a new water heater, or some other costly home repair. If you are buying a $250,000 home, you’d be wise to estimate annual maintenance costs of $2500, which breaks down to just under $210 per month. Ideally, you’d be setting this money aside for future home repairs — so when your dishwasher takes a nose dive, your sprinkler system needs updating, or your roof springs a leak you are in a position to make the necessary repairs without whipping out a credit card or borrowing money from Uncle Lou.
What other plans, goals, and dreams are in your future? Do you have kids, or want to have them in the next 5-10 years? Do you enjoy travel, or driving high end vehicles? Do you have kids in college, or kids who might attend college 3-5 years down the road? What about retirement? A particular mortgage amount may work for you now, but be a lesser fit 3, 5, or 10 years down the road. When you’re considering your first (or next) mortgage, think further than 6 months down the road, think 6 years or longer, before you make a long term housing commitment.
How can I help you make a sound housing decision? Whether you’re looking for a reputable lender, looking for your first (or next) home, or looking to sell your home or investment property, I’d love to help you achieve your Denver Area Real Estate goals.