Set a Realistic Budget When Shopping for a New House

If you are planning to buy a house, then it is very important to have a realistic budget in mind to avoid defaulting on your mortgage loan. You should carefully evaluate how much you can afford to put down and how much loan you need to apply for. There are many principles that you can follow for assessing how much you can afford to spend on your house.

A popular method used is the 28/36 rule. According to this, your monthly payment towards your mortgage loan should be less that 28% of your gross income and your overall monthly debt payments should be less than 36% of your gross income. This thumb rule is even used by real estate agents, mortgage brokers and lenders. This is used to assess if you can afford the mortgage on the house or not.

For applying this rule, you must check how many monthly payments you have to make towards your existing debts. Next, check how many monthly payments you will have to make towards the mortgage loans and then use the figures to calculate the total mortgage loan you can afford. In all these calculations, take into account the number of years you will be paying back the mortgage for. Also, keep in consideration the interest payments on the mortgages.

For example, if you have to set aside 10% of your income towards auto loans and other debts, then you can pay 26% of your income towards monthly mortgage payments. Remember that there is a 28% cap on your monthly contribution towards mortgage.

I would also advise that you think about how much of your net income you would like to spend on your house. To me, spending even one-fourth of the monthly income towards mortgage payments doesn’t sound like a good idea. You also need to think about other financial goals such as retirement savings, payments towards education etc, and see that after your debt payments, you are left with enough money for these as well.

If you want a bigger house and it is coming with a higher mortgage, then you should wait for a couple of years and see if you can save more money for a bigger down payment. Remember that maintenance expenses of a larger house will be high too. Do not end up in a situation where you cannot afford the house you are living in and are forced to give it up.

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