Careful borrowing
Matt asked:
I need help figuring out how much of my income should be devoted to owning a home. As a 1st time prospective homebuyer I don't want to over extend my family's finances at all. Some people say 33% of your gross income and others say 33% of your Take-Home income... What should I be limiting my housing expense at? Ball park we make $105k combined with zero debt of any kind except for 2 more year on a car loan which we owe $6,000. Any advice would be greatly appreciated!
For the total novices:
There are two ratios that lenders look at
1. First there is a ratio of your income compared to your housing cost (principal, interest, property tax and home hazard insurance.)
2. The second ratio is your income compared to your housing expense plus all your other ongoing debt (rotating balances on your credit cards, car loans, student loans, mortgages on other homes, home equity loans…)
Back to Matt’s question:
In regard to your car loan: If you can qualify for a loan with 33 percent of your gross pay for your housing expense, you should be able to handle the next two years with a car loan also. The key is to keep your housing costs where you can handle them.
That said, 33 percent of your gross income is the standard that is tried and true. People who hold to that limit tend to avoid problems. The mess occurred when that limit was ignored by masses of lenders and borrowers.
Something else to consider: If you are a two-earner household, figure an average income that allows for maternity leave through your child-bearing years. If you are going to have children, your income will drop just when you need it.
While I’m telling you to be careful: I advise you to limit your down payment so that you still have 3 months of living expense still in the bank after closing.
I bet I just talked a few of you out of buying. So be it.
