What Can I Afford?

The general rule of thumb is that you can spend one percent (1%) of the purchase price annually on repairing gutters, caulking windows, sealing the driveway, and myriad other maintenance items that comes with homeownership. Newer homes tend to cost less to maintain than older homes, but that can vary based on how well the older home was cared for over the years.

The debt-to-income ratio (DTI) is a percentage lenders calculate to determine how much money is spent versus the amount of income in the household. The standard debt-to-income ratio used by most lenders limits the mortgage payment to twenty-eight percent (28%) of the applicant's gross income. The monthly mortgage payment, combined with all other debts, is often limited to thirty-six percent (36%) of the gross income.

Knowing what you can afford comfortably is the first task in your home-buying journey. Lenders prefer that borrowers spend no more than twenty-eight percent (28%) of their gross income on the monthly mortgage payment, and no more than thirty-six (36%) percent on total debt. It's worth checking with multiple lenders before searching for houses. Most are happy to calculate a rough estimate of what you can afford and/or prequalify you for a loan.

What you can afford to pay for a property will depend on these six factors:

1. Gross income;
2. Interest rates;
3. Credit history;
4. Outstanding debt(s);
5. Type of mortgage selected;
6. Downpayment (including closing costs and cash reserves required by the lender).

These are common reasons for buying a house:

1. You need a tax break;
2. You want a hedge against inflation;
3. You prefer to own instead of renting;
4. The monthly payments are affordable;
5. You can afford the maintenance expenses;
6. You are not counting on short-term appreciation;
7. You plan to stay in the house for at least two years;
8. You are not overly concerned by dips in the housing market.