How Much House Can I Afford?

Here’s a news flash: it’s NOT what the bank tells you from a calculation!

When considering you for a mortgage loan, the bank calculates your debt-to-income ratio and arrives at a payment they think you can make, but there’s a problem: the bank doesn’t know your other spending habits and obligations. They don’t know how many kids you have, whether they go to private schools, or what kind of car you drive. They don’t even care if you save for retirement. They just care about whether you can make their payment.

With that in mind, here are three common pitfalls to avoid when deciding how much you’re going to spend on a house:

• People often make plans to cut back on spending in one area and apply the savings to the house payment, but this is almost always a mistake for two reasons: A) unless you and your spouse are Mr. and Mrs. Discipline, you’re not going to cut back, and B) you won’t be able to cut back because your new house is going to be more expensive to maintain.

• You must allow for increased maintenance costs. If you are moving to a nicer/larger house, your insurance premiums will be higher on your new home. If the yard at your new house is bigger and you hire people to your do lawn care for you, that’s going to cost more. Your property taxes are going to go up, too, and if you are moving to another municipality, the local taxes could be considerably higher.

• Be wary of over-extending yourself on your down payment. Remember to leave enough money to pay for the move and for the new furniture you’ll need. And for the spouse that manages the families finances don’t make the mistake of failing to account for everyone’s needs and tastes. You may think you can live without some things that will save money, but what you may view as unnecessary may be non-negotiable for your spouse. Be honest with yourself when you consider what things your family can do without.

Assuming all things are equal, the bottom line is this: how much additional savings are you able to put away every month beyond what you need to save? That’s how much extra you can afford to spend on a house.

-Jay McGowan-