Calculate Your Housing Budget – Know What You Can Afford Before Buying

Before you start looking for homes, it’s a smart idea to calculate your housing budget. That way, you know just what you can afford and what you can pay.

Let’s look at how a lender will qualify you for a loan. They look at the following items:

Credit score.
Debt-to-income ratio.
Employment history.

Lenders generally like to keep housing expenses (principal, interest, taxes and homeowners insurance) down to 28% of your monthly gross income. However, it depends on your debts and other expenses. The debt-to-income ratio, which includes other debt such as auto or student loans should be less than 36% of your gross income. Sometimes this can increase to as much as 45%, though.

When you budget, think about keeping 1-3% of the value of the property aside for home repairs and maintenance. Also, most homeowners need to stay in their home for five to seven years in order to gain equity. Look at any changes you might be making in that time period. If you plan on having children, one parent may work less. Or, if your income level fluctuates, base your budget on a year in which you do not earn as much money.

If your financial outlook is good, you are debt-free and know your income will increase, you can increase your housing budget as well.

Even in tough economic times, buying an affordable home is a good way to maintain and build wealth.