Can I afford to buy a home?

There are a couple of ways to approach the question “Can I afford to buy a home”? One way is to see it from they eyes of a lender. Most lenders agree on the following guidelines:

  • Your debt-to-income ration can be no more than 36%
  • A housing payment-to-income ration of no more than 33%, preferably around 28%
  • Good Credit history
  • Required Down payment or around 5%

If you meet all of those guidelines then you will have a good shot at getting a home loan from a lender.

However from your own personal financial situation you may get a different answer. From my own personal experience most lenders will offer to lend you more money than you can really afford. Lenders don’t factor other spending habits into the equation such as entertainment budgets, giving to charities, medical expenses and many other budgeted expenses. They also do not factor in future expenses such as retirement, college, weddings, etc.

Additional expenses will include possible home improvements you want to make once you move into your home. Paint, blinds, new carpet and an extensive list of improvement will probably cross your mind.

Before you decide how much money you spend on buying a home you should do a detailed budget analysis. Find out exactly how much money you are spending each month and how much you are saving. Don’t forget to include all of you and your spouses’ income as well as all your expenses. Also, include room for other future expenses that I mentioned earlier. Once you find your target amount find a good mortgage calculator online that will tell you how much house you can afford.

Once you have all these numbers calculated give it a test run. For the next three months pretend like you have purchased your home. Instead of actually paying the house payment put this money into savings. Not only will it inform you that you can afford a house, but it will give you additional money to pay down on the home or to purchase those possible improvements once you move into your new home.

So, if you are wondering if you can afford to buy a home use the lender guidelines as a starting point, follow up with a detailed personal budget analysis, do a test run and finish off with even more research.