In recent years, a number of new homebuyers learned a harsh lesson about spending beyond their means on mortgages and other housing expenses. Before looking at specific homes, or even speaking with a real estate professional, every potential homebuyer should take the time to determine an appropriate monthly housing budget.
Current Monthly Expenses
The best place to start when figuring out how much you can afford to pay for a house is with the current monthly budget. A base figure for an affordable monthly housing payment can be found by subtracting necessary household expenses from average monthly income. After listing every expense paid on a monthly basis, such as car insurance and food, look for things that can be scaled back or eliminated entirely. For example, if you spend $150 a month on entertainment or luxury items, consider restricting that expense to make additional room for mortgage payments.
Percentage of Monthly Income
A general rule of thumb recommended by most financial experts is that no one, no matter how well-off they currently are, should spend in excess of 30 percent of a monthly income on housing. Add together salary wages, average monthly investment income and other sources of household income, then multiply that amount by 30 percent. Know this number and compare it to what is left in your monthly income after the existing budget has been detracted. Ideally, the mortgage payment you commit to will fall between these two numbers.
Awareness of Debt
The amount of existing debt you are currently paying off should have an impact on the monthly budget you arrive at for house payments. The most you should spend monthly on debt repayment is around two-thirds of your monthly income. Determine what percentage of monthly income you are currently spending on debt, such as car loans and credit cards, to get a clear idea of how much you can afford on mortgage payments without exceeding that two-thirds mark. If the amount paid monthly toward existing debt already exceeds two-thirds, a large financed purchase like a home may not be financially responsible.
Remember the Down Payment
The down payment that will be made toward the purchase of a home should be considered while deciding on an affordable budget. Many homebuyers make the mistake of draining their savings in order to afford down payments, which should be a strong indication that the house being financed is outside of their realistic budget. In an ideal situation, there will be a financial cushion left among savings, retirement and investment accounts after the down payment has been made. The cushion will be available to help cover unexpected moving and settling expenses, which always pop up when purchasing and moving into a new home.
A concrete maximum monthly housing budget should be decided on before anyone starts shopping for a home. There is a certain level of excitement involved in the sales process of any large purchase, especially the purchase of a house. By deciding on a budget before the sales process begins, that excitement can’t affect how much you inevitably spend on a mortgage.
About the Author
Jayson works at Republic Property Tax in Houston, Texas. They provide property tax appeals in Fort Bend County, Galveston County and Harris County.