One of the biggest questions that homebuyers have is “how much should I spend on a home?” There is no easy way to answer this question. Homebuyers have a few ways that they can determine how much they can afford to spend on a new home, but the most common ways to do so are:
Look at your salary.
A lot of financial experts will tell their clients to determine how much they can afford to spend by looking at their salary. It is recommended that you can afford to purchase a home that is priced around two to three times what you make every year. For example, if your annual salary is $80,000, then using this way of thinking, you can afford to purchase a home that is between $160,000 and $240,000. If you are in a partnership or marriage, you should combine both of your salaries to estimate how much you can afford to spend. However, the downside of this approach is it does not factor in other expenses.
Use the 28/36 rule.
The 28/36 rule is used by financial planners everywhere to determine how much clients can spend on a home. In this rule, the 28 represents your monthly expenses related to the house, including mortgage payments, insurance, taxes and HOA fees. When you add these expenses up, they should be less than or equal to 28% of your gross monthly income. If you make $5,000 a month before taxes are taken out of your paycheck, then you should plan on spending $1,400 or less on these expenses every month.
The 36 in this rule represents your debt to income ratio. This ratio will look at how much money you owe on credit cards, loans and other debts, compared to how much you’re taking in every month. This ratio should be less than or equal to 36% at all times if you wish to follow the 28/36 way of thinking. For example, let’s go back to the example where you make $5,000 a month before taxes are taken out. Out of that $5,000, let’s say you spend $600 a month paying off your various debts. That means you currently have a debt to income ratio of 12%, which is $600 divided by $5,000. But then, if you add in another $1,400 in expenses from the house that you plan on buying, your debt to income ratio will increase to 40%, which is too high according to this rule. Use this rule to calculate how much you can afford to spend on a monthly mortgage payment before you purchase a home.
After using these calculations, you may find that you shouldn’t spend as much as you thought you should. If that’s the case, make a list of features that you are willing to compromise on that could lower the price of your dream home. For example, maybe you can find a home right outside your dream neighborhood instead of behind the gates of it. Prioritize what’s important to you, and you’ll be able to find the home of your dreams.
Now that you know how much you can afford to spend, are you ready to find your dream home? Contact our real estate experts at Coast 2 Coast Realty for help exploring the Tampa Bay market!