This is a question that many homebuyers ask me in my profession. How much should they be spending on a mortgage? Of course, how much could the spend and how much should they spend are two different things. Could and should can mean two different things to different people. We could certainly take that extra helping of ice cream after dinner but should we?
When you're talking about how much of our income should be spent on housing it really depends on how much you will be borrowing. If you can afford it and you're buying cash then, of course there's no need to worry about a mortgage payment. But most of us live in the real world where we have to finance real estate and apply for a mortgage. Here's where the rules come into play.
In order to get the best rate and terms on your mortgage, you'll need to have a down payment and a decent or good credit score. Anything over 650 is a pretty good credit score but anything over 800 is considered excellent. Paying your bills on time, not having any high debts or maxed out credit cards or any past delinquencies can really increase your credit score, making your interest rates lower and giving you better terms on a mortgage.
On average, lenders like to see no more than 20% to 30% of your monthly income towards housing.
This is on the take-home amount. If you gross $100,000 a year but you only take on $50,000, you certainly can't have up to 30% of your housing income on the $100,000. That simply would not work.
The website on housing affordability states that "families who pay more than 30% of their income for housing consider cost burdened and may have difficulty affording necessities such as food, clothing, transportation, and medical care.". 30% is typically a good number so let's say you bring home $50,000 a year, that means that no more than $15,000 should be spent on your monthly rent or mortgage payment. This is equal to about $1250 per month on a mortgage payment. This means you can probably comfortably afford this type of payment including all your other necessities such as food and clothing.
Now, other factors come into play. Let's say that you have five credit cards and all of them are maxed out. For starters, you probably will not be getting a good interest rate or even a mortgage for that matter if you are late on any of those payments. But, if all those payments together and up to about $2000 a month, you simply may not have enough to make that $1250 payment.
This is where lenders come into play. They look at how much you can afford, how much you have coming in and then how much you have going out in liabilities and debts each month. Car payments, student loans, credit card payments and other debts all factor in to exactly how much you can afford.
If you make $50,000 a year and simply have the basic such as utilities, rent, food and clothing, you may be able to afford a little bit more, possibly 35% of your income since there are no additional debts to be considered. However, each situation is unique so you'll need to sit down with a lender to discuss all of the debts, liabilities, assets and income in order to determine the best price.
To get started on doing so contact my office today. We can run the numbers, make sense of your financial situation and find out where you are on the home buying process and then get you in touch with a lender in our area.