Deciding how much house you can afford
Your lender
decides what you can borrow but you decide what you can afford.Lenders are careful, but they make qualification decisions
based on averages and formulas. They won’t
understand the
nuances of your lifestyle and spending patterns quite as well as
you do. So, leave a
little
room for the unexpected – for all the
new opportunities your home will give you to spend money,
from
furnishings, to landscaping, to repairs.
Historically, banks use a ratio called 28/36 to decide how
much borrowers could borrow. An approved
housing payment
couldn’t be more than 28 percent of the buyer’s gross monthly
income, and his or her
total debt load, including car payments,
student loans, and credit card payments, couldn’t be more
than
36
percent. (In Canada lenders apply similar formulas to
determine how much a buyer can afford.
The Gross
Debt Service
ratio, or GDS, is not to exceed 32 percent of the buyer’s gross
monthly income,
and the Total Debt Service ratio, or TDS, is not
to exceed 40 percent of the buyer’s total debt load.)
As home
prices have
risen, some lenders have responded by stretching
these ratios to as high as
50 percent. No matter how
expensive
your market though, we urge you to think carefully before
stretching your budget quite so much.
Deciding how much you can afford should involve some careful
attention to how your financial profile
will
change in the
upcoming years. In the long run, your own peace of mind and
security will matter
most. |
