1 Simple Way to Nail Down How Much House You Can Actually Afford

By Nathan Hamilton Markets Fool.com

Credit: Getty Images

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The unfortunate reality is our expenses over the past decade are outpacing the growth of our incomes, leading Americans to take on additional debt, including for a mortgage. And the truth is, a mortgage is many people's largest expense each month and long-term financial goals may be won or lost based on how much money is left in the bank after monthly bills are paid.

With this in mind, Motley Fool analysts, Kristine Hartjes and Nathan Hamilton, discuss in the video below one simple way to uncover how much house you may be able to afford while leaving enough room to save and invest for retirement.

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KRISTINE HARJES:

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So Nathan, say I want to buy a house. There's so much information out there telling me what I can and can't afford. Can you boil that down for me?

NATHAN HAMILTON:

Yes. One number that is super helpful is looking at your debt-to-income ratio. A lender will lend you up to 43% of your debt-to-income. And to explain that ratio is rather straightforward. Take a look at how much you pay monthly for your obligations versus how much income you're bringing in, and a bank will lend you the difference between where you are currently and that 43%.

And it helps you figure you out [how much you can afford for a house]. And we would say to really be safe with your finances, that to be able to afford a home, invest in your future, cover renovation expenses and anything that life throws at you, you really need to be below 35% to be safe.

KRISTINE HARJES:

That oddly still sounds like a pretty high number when you think about it.

NATHAN HAMILTON:

It is.

KRISTINE HARJES:

So say you're making $10,000 in a given month, and you're paying 35% of that straight to the cost of your home. That doesn't leave a whole lot after your taxes and everything to cover all these incidentals, especially when you think that homes are kind of expensive.

NATHAN HAMILTON:

They tend to be.

KRISTINE HARJES:

You get the roof leaking every once in a while and all the little things that happen with the upkeep, so that's a really helpful ratio to know.

NATHAN HAMILTON:

And one thing to note on that. Thirty-five percent isn't just your face value mortgage payment. Look at it with your HOA fees, any other insurance that you have on top of the house...

KRISTINE HARJES:

Taxes...

NATHAN HAMILTON:

You have to account for that stuff. I would say 35% as your home all-in. Look at it that way.

KRISTINE HARJES:

Yeah, and again you do want to keep that in mind, specifically because lenders will lend you up to 43%...

NATHAN HAMILTON:

Yes.

KRISTINE HARJES:

...so if you want to take our advice and be a little bit more conservative, 35% is really more what you should be targeting.

NATHAN HAMILTON:

Live stress free with your finances, if you can.

KRISTINE HARJES:

Exactly. So can we run through a couple of numbers just to see how this works?

NATHAN HAMILTON:

So look at the average American's household income as right around $55,000. If you break that down, for somebody that doesn't have any debts at all, that essentially equates to a $1,604 monthly mortgage payment. And without a down payment at all, which isn't super realistic, the total mortgage that that could buy you is $335,000.

KRISTINE HARJES:

And it's important to note that that was also a no-debt scenario; whereas most Americans average just over $16,000 worth of credit card debt alone, and that's not even talking about student loans...

NATHAN HAMILTON:

Student loans, cars, everything else.

KRISTINE HARJES:

Exactly.

NATHAN HAMILTON:

Yup.

KRISTINE HARJES:

So if you're looking for some more calculators or to compare rates, head to Fool.com/Mortgages where you can find out more information about mortgages, you can run some numbers, you can get in contact with certified lenders, and you can even download our free mortgage guide, "5 Tips to Increase Your Credit Score Over 800."

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