Last August, I asked the question, “How much home can you afford?” After working with several first time buyers and friends who are considering making their first purchase since then, I discovered three powerful questions that simplify the process. The first question, which I touched on previously, involves figuring out what your comfortable paying given your lifestyle needs, stress tolerance and investing style. For example, you may be comfortable paying $4000 although lenders approve you for a monthly payment of $6000. With the future in mind, consider the lifestyle you want and the sacrifices you are willing to make.
Question 1: What is a comfortable monthly payment given the lifestyle that I want?
Before the recent mortgage craze, where people stated income (instead of documenting it) and bet on future appreciation with options ARMS, home buyers used a simple, rule-of-thumb calculation to determine their readiness: debt-to-income ratio. The rule recommends a maximum monthly mortgage payment that is forty percent of your gross monthly income. Anything more is too much. For example, if your gross monthly income is $10,000, then your suggested maximum payment is $4,000. And it’s really that simple.
Question 2: What is my suggested maximum payment?
Although sticking to a forty-percent debt-to-income ratio is recommended, exceeding it may make sense in some situations. Some of my past clients bought homes with debt-to-income ratios closer to fifty-percent. When asked if they’d do it again, they reply, “Certainly.” Which brings us to what many Realtors jokingly call the ramen factor. The ramen factor suggests buying a home at a price where the payments require eating ramen noodles for a year. Why would anyone ever do this? Simple: nearly all home buyers wish they bought more home after year one. Over time, home buyers adjust to their payments, incomes increase and situations improve. I recommend buying as much home as you can possibly afford.
Question 3: What is my ramen factor?
Understanding how much home you can afford begins with sitting down, listing out all income and expenses, and answering the previous questions. The second half of the equation requires talking with a great mortgage broker. Like fine tailors, a great mortgage broker quickly sizes up your financial situation and fits you with the best lending products available. A great mortgage broker is worth her weight in gold. Drop me a line if you’d like a recommendation.
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