1 Way to Help Figure Out How Much Home You Can Afford

By Nathan Hamilton Markets Fool.com

When each month comes to a close, chances are that the bulk of most homeowners expenditures went towards their mortgages. Beating budgeting and savings goals comes down to figuring out how much house makes sense for your finances.

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With this in mind, Motley Fool analysts, Gaby Lapera and Nathan Hamilton, discuss in the video below why homeowners may want to pay attention to one certain number when eyeing a new home purchase.

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Gaby Lapera: What is the best way to figure out how much house my family can actually afford, from Linda.

Nathan Hamilton: That gets back to what we were talking about before with essentially the 30-35% debt to income ratio. Banks, it's very important to keep this in mind. Don't believe what banks will generally lend you.

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Lapera: Yeah, no it's crazy.

Hamilton: Yeah. It really is if you run through your personal budget numbers, they'll lend you typically up to 43% debt to income. If you put that in context, average new home buyer spends about $13,000 on renovations, new home costs and so forth. I would guess that most people buying a home also overshoot their budget. It's an emotional purchase. If you tack on those few things, of maybe bad financial decisions, just overspending your budget, spending too much on renovations, you're suddenly in a place where you're not able to save money. You're not able to invest for your child's education, for college. You're not able to take the vacations you want.

There's more stress in terms of paying bills. Really that 43% number, I don't know how banks get away with it. Generally, for most people, it's just going to be far too high.

Lapera: Yeah. I, when I first moved to the D.C. area and got this job, I was like, "Maybe I should think about buying." I looked at the home prices and I was like, "Heck, no." I did ask my bank, informally how much would they think about lending me if I did consider buying, which is one of the things you should do if you're shopping for mortgages. The number they gave me was out of control.

It's also like when I applied for a credit card. The amount that they gave me, my credit limit. I'm like, "You guys are crazy." This is so incredibly irresponsible of you. It was a third of my income, my yearly income. I'm like, "That's insane."

Hamilton: Yeah. The question of how much house can I actually afford. You've got your simple answer of 30-35% debt to income. To me, what that question actually means is if somebody is asking that, I think they just need to take a closer look at the money coming into their accounts versus going out and saying, "Okay. What can I budget for?"

If you know what you're spending, you have a good understanding of saying, "Okay. 43% is far out from what I can actually afford." It's just a matter of knowing your numbers a little bit better.

Lapera: Yeah. One thing, there's some things that people should definitely look for, especially if they're going from renting to owning, as opposed to selling their house and buying a new one, which is that there are costs associated with home ownership that a lot of times you don't have as a renter.

Maintenance. My dryer broke this weekend. I don't have to pay for it, which is great. If I owned my house, I did, I would have to. A lot of stuff like that that people don't even think about.

That's also why it's really important when you're looking for homes to have a really good inspector come out and check everything to make sure that it's good. You don't want to buy the house and then a year in find out that the foundation is no good and you have to replace it. That's basically replacing the entire house.

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