When you make the decision to buy a home, you will need to make many considerations. However, you should start by determining how much you can afford to spend.
While a lender may give you an idea of how much mortgage you can get, there is a difference between what you spend and what you can afford. You may be able to afford much less than the lender is willing to approve you for. For that reason, even if you have a preapproval for a mortgage, you still need to do your own calculations to determine how much you can really afford to spend.
Rule of thumb
Consumer Reports explains that the general rule is that you should only spend about 25 percent of your income on housing. You should note, though, that housing costs in this situation include maintenance costs and other related expenses.
For example, if your annual income is $100,000, then you should spend no more than $25,000 in housing each year. That does not mean you can afford to buy a house with a monthly payment of $2,083. You need to think about the costs of upkeep for the home and other expenses you will have to put towards the house.
The reason why what the lender says you can afford and what you really can afford differ is the calculations the lender uses. They look at your debt-to-income ratio and not a percentage of your income. Lenders typically want to see your DTI at 43% or lower.
Using that rule, with a salary of $100,000 a year or about $8,333 a month, your lender might approve you for a loan that far exceeds the $2,083 monthly payment that is 25% of your income.
Get more home
Following the 25% rule will probably qualify you for a much lower house cost than you first thought you could afford. However, you can buy more house if you put down a larger down payment. The goal here is not to limit your options but to ensure that you can afford the house and will not end up in foreclosure down the road.