How Much To Borrow To Buy A Home?

Fortunately Debt-to-Income ratios allowed by banks have been lowered.  At one time people could have  62% of their income paying debt each month.  Take out the taxes at just 25% and you have 13% of your income to pay for utilities, food, and gas.  Doesn’t make much sense does it.

Typical ratios now are 43%.  Experts say you shouldn’t have your house payment more than 33% of your income.  I have advised my clients to keep their payments under control and low so they can weather surprises like roof leaks, repairs and just life events.

If they can’t afford the home now I suggest that they rent, take the difference between a house payment and rent, and build up their savings.  Few have been able to have the will power to do that which helps make a point that their finances aren’t under control.

I found this pdf that perfectly illustrates how important it is to live within our means.  (via The Simple Dollar)

Let’s say you earn $30,000 a year but spend $31,000.  The following year you do the same thing, plus you spend $300 more making minimum payments on that $1000 which leaves you $2,200 in the hole. After the third year, you’re $3,600 in debt.

On the other hand, let’s say you spend $29,000 a year, which is just $2,000 less in spending.  If you throw that $1,000 into a 3% interest account, in year three you have $3,060.90.  There is a $6,000 difference by saving $3,000.

I will admit that this is simple math.  Commission based earners, like Realtors, have a tough time knowing what money is going to come in and have to advertise and buy supplies.  But everyone I know that is having money problems is still buying their Starbucks or soda every day.  That alone is $1000 a year and in three years is part of a $6,000 swing.

The $8,000 tax credit, that may or may not be extended beyond it’s December deadline, is going to cause a rush by some to buy a house, which is what happened in 2005 and 2006.  They thought they needed to buy when they may have been better off renting and saving.  The one thing I have been constantly saying is make sure you are buying for the right reason and keep it within your means.

Photo via http://www.flickr.com/photos/seier/