Your lender may be the one to decide what you can borrow, but you are the one to decide what you can afford.
Lenders are very good at what they do, but they make qualification decisions based on averages and formulas. They cannot understand the nuances of your lifestyle and your spending patterns the same way you do. So, consider leaving a little room for the unexpected – for all the new opportunities your home will give you to spend money. From furnishings, to landscaping, to repairs, you may find yourself spending quite a lot after moving in.
Historically, banks use a ratio called 28/36 to decide how much borrowers can borrow. An approved housing payment couldn’t be more than 28 percent of the buyer’s gross monthly income. In addition, the borrower’s total debt load (including car payments, student loans, and credit card payments) cannot exceed 36 percent. At times when home prices have risen, some lenders have responded by stretching these ratios to as high as 50 percent. No matter how expensive your market might be, I urge you to think carefully before stretching your budget too much.
Deciding how much you can afford should involve some very careful attention to how your financial profile will change in the upcoming years. In the long run, your own peace of mind and security will matter most of all.