It’s easy to let the excitement of shopping for a home overtake your more reasonable side. But just because you can technically afford a payment, doesn’t mean you should because it's not much fun being house poor. Your monthly budget is one of the best tools for learning where you stand financially, and how much housing costs you can afford without living in a bind.
Traditional lending advice says your total debt-to-income ratio should be no more than 36 percent, according to CNN Money's “How Much House Can You Afford?” Of that, your housing costs should take up no more than 28 percent. Less than that and you’re doing great.
But there’s more to home ownership than the mortgage payment, and those nickels and dimes can add up to a lot more than you anticipated. (Read: True Cost of Home Ownership) Here’s how to use your budget to determine what you can really afford.
Fixed Monthly Budget Expenses
Your fixed expenses are reasonably consistent. The payments might vary, but you know you’ll always make those payments every month. These might include a vehicle payment, credit cards, utilities, and any other bill you pay every month, like a student loan.
Fixed expenses will change when you buy a house. Your housing payment will change, because you’ll be taking on a mortgage. Your utilities will be different, and you’ll have property taxes and home owner’s insurance, which are new fixed expenses, as well.
Remember that more will change besides a new housing payment. Sort out which fixed expenses will go, such as current rent and renter’s insurance, and which new expenses will arrive when you take on a mortgage.
Variable Monthly Expenses Aren’t Trivial
Your variable monthly budget expenses include everything that you can control, and some things that you can’t. They might include cable and Internet (although some people consider those mandatory and fixed), dining out, and even coffee on the way to work.
Variable expenses could change your budget in a major way when you buy a house. You’ll almost certainly have things you want to do, such as painting and decorating. But you might also have unforeseen repairs to handle, and there’s no landlord to take care of those.
Variable expenses might need sincere attention if you plan to buy a house. What once was important might need to take a back seat to what will be important later. A splurge on detailing your car might have to wait until after you’ve paid the plumber for a leak under the kitchen.
Your monthly budget gives you the framework for determining how much home you can afford. It shows where you are right now, but it also helps you imagine where you could be later.
Time was, advisers told potential home buyers to “buy poor” because “you’ll grow into it.” That only means if you strap yourself right now, you’ll eventually adapt to it. But new home owners are no longer following that advice, opting for a more conservative approach based on the housing problems in the late 2000s.
It’s a lot more fun to own a modest home where you can still enjoy life, than it is to reach for the stars. You don't want to worry about spending all your disposable income. (Read: Will Your Dream House be Perfect?) Keep the 36 percent total debt-to-income ratio in mind, and remember that your mortgage shouldn’t account for more than a quarter of your total income. CNN has a great “Affordable Home Calculator” that can do the math for you! If you stay in those parameters, you’ll more likely to live as comfortably as you had hoped.
If you could advise your fellow potential home buyers, what wisdom would you share? We would love to hear about it!