Blog:
How do I know what I can afford?
I was around during the mortgage crisis, and have learned a few things that I love to pass along. Take my advice or not, it’s up to you…but at the least I ask that you read and consider it.
The 25% “RULE”
You know yourself and your spending habits pretty well, and if you’re comfortable only paying as much as you currently pay for rent, consider that as your payment baseline.
LOOK AT YOUR MONTHLY BUDGET – scrutinize your current financial situation. A good rule of thumb is that your monthly mortgage payment should not be more than 25% of your monthly BEFORE TAX income. So, if your paycheck says you earn $2,400 per month in wages before Uncle Sam gets his part and any other mandatory deductions (ie: child support, etc.), you shouldn’t be paying more than $600 for the mortgage or rent payment every month. You won’t feel stretched and you’ll still be able to meet up with a few friends for happy hour too!
Another factor – two incomes
If you are considering buying a home with another person, base your monthly payment on only one of your incomes (and yes, go ahead and use the bigger income if you want). But I can’t buy the castle on the corner!!! The bigger question is do you REALLY need that? My theory is that if more people had done this back in the early 2000’s, we would never have had a National Mortgage Crisis.
Here’s why: If by some very unfortunate circumstance one of you lose your job, you will probably have to dip into the money you saved from the second income, but you won’t have to really worry about losing the house for a while (I hope). If the monthly payment was based on two incomes, the boat starts to sink – QUICKLY. And if it’s sinking quickly, the relationship (which is always far more important than the building) becomes strained, there are disagreements about money and you may be reduced to peanut butter sandwiches for dinner – not pretty!!! What happens if you have children to care for – or someone gets sick and all of a sudden that second income is just not there?
Please, consider this very, very carefully….
Build some equity in the first home you buy, make some improvements, and then, if you need to move on, hopefully you will be moving on to a bigger or better place because you will have made a profit! No one has a crystal ball and things change all the time with employment, life situations and the ability to make payments …. So, be wise!
There are more tips and easy math in the e-book “Home Sweet Home – Help for the First-time Home Buyer” available at out website: http://homesweethomeanswers.com/ . Get yourself a copy and be confident in your finances even before you make an offer on your “Dream Home.”