How Much Should You Spend on a House?

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How Much Should You Spend on a House?

Rachel Hanson, Contributing Writer

The sub-prime mortgage crisis in America has a lot of people wondering how so many people have gotten themselves into so much trouble.  Sparing all the gory details, essentially the root of the problem is that a lot of people have made an investment in real estate that was actually far beyond their budget.  In order to successfully pay a mortgage every month, the amount of money that has to go to the mortgage payment should only be a fraction of the household income.  If the mortgage amount is too high a percentage of the total household income, eventually, something’s got to give.  So just what is that percentage rate that housing costs should be?

Of course, the amount that one spends out of their budget on housing costs will vary across the nation.  For example, house prices are significantly higher in California than in Florida, but then again, the average salaries also differ.  The point is, as a general rule, one should not budget more than 30-35% of their total income toward housing costs.  That is probably a number you’ve heard before.  Did you also know that in ‘housing costs’, real estate taxes and large household repairs should be included?

Getting Realistic

The problems behind the sub-prime mortgage crisis are somewhat simple when it comes to individual people.  If the bank approves you for a certain size loan, the reaction is ‘Great!  We CAN get that house we were eyeing’.  What we often forget is that it’s in the lender’s best interest to stretch the reality of your budget a bit; lenders always go for the best-case scenario and offer you a loan based on your income, without taking into account any sort of unforeseen circumstances or, for example, the fact that most people put a portion of their monthly income into savings.  If the bank approves you for a loan that’s really stretching your budget, the real estate you thought was a solid investment could turn out to be a financial burden.

Numbers

When deciding what percentage of your household income you would like to devote to a real estate payment, think about some of the worst-case scenarios as you compute the numbers.  Perhaps you are currently a two-earner household, but what will happen if one of you gets laid off, decides to go back to school or gets pregnant?  How will your financial situation change in each of those situations, and will you still be able to make your mortgage payment?  First-time homeowners can seek out the advice of a financial planner to help discuss these possibilities.  Remember, your counselor at the bank or mortgage lender is in the business of making money off your interest payment.  In this respect, a financial planner is a neutral third party who only asks an hourly fee for their time.

Take the time to crunch the numbers and then ask around for advice.  There are certainly plenty of homeowners with horror stories to share at the moment.  Don’t let these horror stories talk you out of investing in a home if that’s what you want to do.  The housing market is volatile at the moment, but because so many people are being forced to foreclose, prices are lower than they’ve been in many years.  If you’ve thought everything out carefully and sought the advice of a professional, trust your calculations and go for it.  The market has not been this ripe for a few years, so you can get more house for your money now than you could just three years ago.

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