Determining Your Home-Buying Budget
Before you start browsing listings, the most important step is to figure out how much house you can realistically afford. Overextending yourself can lead to financial stress and put your other goals at risk. Lenders and financial experts use several guidelines to help you find a comfortable price range.
The 28/36 Rule: A Lender's Guideline
One of the most common rules of thumb is the 28/36 rule. Lenders use this to assess your capacity to handle a mortgage.
- The 28% Rule (Front-End Ratio): Your total housing costs (principal, interest, taxes, and insurance - PITI) should not exceed 28% of your gross monthly income.
- The 36% Rule (Back-End Ratio): Your total debt payments (including your new housing payment, car loans, student loans, and credit cards) should not exceed 36% of your gross monthly income.
The lower of these two calculations is often what lenders will use to determine your maximum loan amount.
Beyond the Rules: A Holistic View
While the 28/36 rule is a great starting point, you should also consider:
- Your Down Payment: A larger down payment (ideally 20% to avoid private mortgage insurance) will lower your monthly payment and the total interest you pay.
- Your Emergency Fund: Don't deplete your savings for a down payment. Ensure you have 3-6 months of living expenses set aside for unexpected costs.
- Your Lifestyle: Do you want to have money left over for travel, hobbies, and investing? Don't become "house poor" by buying at the absolute top of your budget.
Moneko's Tools for Home Buyers
- Calculate Your Budget: Use the Moneko Mortgage Calculator to experiment with different home prices, down payments, and interest rates to see what your monthly payment would be.
- Check Your Affordability: Input your income and debts into the calculator to see if your desired home price fits within the 28/36 rule.
- Get Ready to Buy: Ask the Moneko AI Financial Educator for a checklist of steps to take before buying a home, from improving your credit score to saving for closing costs.
Disclaimer: This content is for informational purposes only and does not constitute financial advice. All investment decisions carry risk. Conduct your own thorough research or consult a qualified financial advisor.