The first thing a buyer should do is figure out how much they can afford for all housing costs based on their budget. This MUST include all property taxes, house insurance, and repairs. Once you buy a house you have to pay for utilities including electricity, heat, & a/c. Sooner or later parts of the house like furnaces, water pumps, flooring, plumbing, and roofs will wear out. These will cost you real money to repair or replace. The monthly mortgage payment is just one part of the true cost of owning a house. The rest has to be included to find a truly affordable monthly house payment.
To find out what can really be your affordable monthly house payment perform a financial survey of your life. Figure out how much you really spend
each month excluding what is spent on rent and other housing costs now. This means you add up whatever you
spend on food, gas, car, clothes, repairs, cable tv, internet, phone,
movies, clothes, and EVERYTHING you spend money on (including bubble gum) for the
month.Â If you only buy clothes (or anything else) once a year divide
that cost into 12 months. Perhaps like me you pay for car insurance (or
something else) every 6 months. Divide that by 6. Whatever this number
is that you spend each month once you subtract it from your monthly income whatever is left is the absolute maximum you can afford to spend on a
house and savings.
The number you just discovered includes the big mortgage payment as well as the smaller non mortgage costs. House insurance,
taxes, electricity, water, sewer, repairs, heat, a/c, and more costs all
have to come in under this amount.
A buyer must save some money for those unanticipated repairs that WILL happen given time. A smart buyer would remove at least 20% of their income for repairs, savings, and retirement. Whatever is left is the most that can really be affordable to spend on a house
The problem with simply asking a lender how much you can afford to borrow on a house is that lenders do not see your real spending habits. A lender might allow you to borrow more or less money than you can truly afford to pay towards a mortgage. Once you have determined what you can safely spend each month do not be surprised if it is a lot less money than what a lender will allow you to borrow. Knowing your own personal comfortable payment level will help you not to become house poor.
I personally would want to save at least 10-20% of my income after all other expenses for things like repairs, savings, and retirement. I would also want to allow for higher food costs, kids approaching their teenage years, higher heating fuel and electricity costs as those costs could rise dramatically in the future.
As a final thought how much can you safely pay each month? A general rule of thumb is no more than 30% of your take home pay. Do not forget to save 20% towards savings, repairs, and retirement. Another old rule of thumb is no more than 3 times your annual income. After doing your own calculations and having your safe monthly payment it is time to get an answer from a lender.