A common problem is people buy or rent too much home. Meaning they are saddled with a large monthly payment. If you fall into this trap, it can keep you from building wealth and gaining financial freedom.
If you’re in the market to buy a home, there are a lot of factors that determine how much you can afford. The number one consideration is what works in your budget, while still maintaining your savings goals. The second consideration is how much of a mortgage you can qualify for.
How do banks decide how much of a mortgage you can can get? They will look at a ton of things. It’ll be everything from your credit score, credit history, employment history, debt to income ratio, and so on.
Depending on the bank and the type of loan, you can usually get a loan if your debt to income ratio is below 36%. Meaning, your total debt payments that you have need to be less than 36% of your income. BUT, as a general rule, in order to make sure you are not spending too much money on your home, you should spend no more than 28% of your gross income on total monthly housing expenses.
We made a few assumptions to be able to provide an estimate of the income needed in our example. We’re using a 30 year fixed mortgage with a 7.5% interest rate, a 1.5% property tax rate, and $1,200 a year for homeowners insurance.
We also used a 10% down payment in our example. Should you put more than 10% down? Yes, if you can it’s usually smart to put more down. It will lower your monthly payment and allow you to avoid what’s called PMI (private mortgage insurance). On most types of loans, PMI is charged as long as the loan balance is more than 80% of the value of the home.
As always, reminding you to build wealth by following the two PFC rules: 1.) Live below your means and 2.) Invest early and often.
-Vivi & Shane
