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It is important to go into the house search and mortgage application process with a clear idea of what you can afford and how much flexibility you may have.



How Much House Can I Afford?

January 15, 2019
By Comerica Bank

Taking out a mortgage represents a huge commitment, and it's understandable if you're a little worried before investing in a house and a long-term relationship with a lender. It is important to go into the house search and mortgage application process with a clear idea of what you can afford and how much flexibility you may have, depending on the specific circumstances of the loan and property you are considering. This is especially true if you are a first time buyer and are not sure about the purchasing process. If you are wondering, "How much house can I afford?" read on to find out.

What should you spend on housing?

Most experts recommend households attempt to spend no more than 30 percent of their pre-tax income on housing. Besides calculating your potential mortgage payment relative to income, don't forget about utilities, insurance and other housing-related costs. This can be difficult in some markets, but individuals who spend less on their day-to-day housing expenses can end up saving money that pays off down the line—such as in their retirement or emergency savings.

Of course, keeping to that 30 percent figure is not easy. In April 2018, the U.S. Bureau of Labor Statistics released data pertaining to consumer income and spending patterns throughout the country. Average consumer spending on housing rose 4.5 percent to $19,325 between 2016 to 2017. In that time, the average household income before taxes was $73,207. Compare that to the expenses on housing, and the average household spends approximately 37 percent of its income on housing.

When you look at your mortgage options, you may want to consider pursuing a figure lower than 30 percent, as a variety of housing-related costs can quickly leave you exceeding what you can realistically afford.

How much debt can most households handle?

Initial spending isn't the only issue to consider. Evaluate your household debt relative to your income, as well. The Consumer Financial Protection Bureau explained that the amount of debt you have relative to your gross monthly income has a major impact on what kind of mortgage you can receive. The ratio is simple: Add up your debt, add up your income and figure out the percent of debt to income. A household with $2,000 in monthly payments related to debt and $6,000 in gross monthly income would have a debt-to-income ratio of 33 percent.

The higher your debt ratio, the more difficult it will be to keep up with payments. The Bureau of Labor Statistics explained that 43 percent is generally the cut-off used when lenders evaluate borrowers for a qualified mortgage. There are exceptions, but 43 percent makes for a standard guideline to work with.

As you try to assess how much mortgage you can afford, look beyond the percentage of income you will be spending on housing, and consider your total debt situation as well. For example, if you currently have a household debt ratio of just 10 percent and then introduce a mortgage, with the expectation of the monthly payment amounting to 30 percent of your household income, you will fall just under that 43 percent threshold.

However, monthly payments aren't the only costs you might accrue when taking on a mortgage. If you think you are cutting it close in terms of your debt-to-income ratio alone, you need to take an especially close look at the added expenses of homeownership to make sure you can actually afford the amount of debt you'll accrue.

What kind of costs can you expect from a mortgage?

Beyond your monthly mortgage payment, buying a house can introduce a variety of expenses you may not be considering. For example, many households find that their utility costs increase because they now have more space to deal with. You also need to consider the tax rate in the state where you'll be purchasing, any local taxes that come with property ownership, homeowner's insurance and any maintenance-related costs that can add up quickly.

Moreover, you need to consider how your down payment will impact your need for mortgage insurance. If the bank isn't satisfied with the amount you've set aside as equity for the home, they may mandate that you insure the mortgage, which can add up to annual costs in the thousands.

So, what can you afford?

We can't provide specific numbers because everybody's situation is unique, but hopefully this guidance helps you calculate a starting point to begin working through your home-buying checklist. Once you have that, it always helps to work with a bank that emphasizes customer service to ensure you get the right mortgage for your needs. Contact Comerica Bank today to learn how we can help you find the right fit.

 

This information is provided for general awareness purposes only and is not intended to be relied upon as legal or compliance advice.

This article is provided for informational purposes only. While the information contained within has been compiled from source[s] which are believed to be reliable and accurate, Comerica Bank does not guarantee its accuracy. Consequently, it should not be considered a comprehensive statement on any matter nor be relied upon as such.