Buying a home is an emotional process. Oftentimes the emotions involved can overpower the logic needed to ensure that a financially responsible home within your price range is your final decision. Owning a home that has a payment that exceeds what will comfortably fit within the monthly budget is one of the most dangerous financial mistakes that can be made. It is imperative to have a clear understanding of the price range you should be considering before you step into the emotional process of buying.
Each of us understands the implications of financial stress, and the unintended consequences that often follow. Life is stressful enough without adding the challenges involved with being “house poor”. Therefore, I take very seriously the responsibility of ensuring my clients make wise decisions when determining a home price.
When advising you about how much you should spend on a home, We’ll first focus on the following primary questions:
- What is a comfortable monthly payment for you?
- How much money do you have to put down on a home?
- Which of the following describes you financially? Risk taker, moderate or conservative?
- How long do you plan to own the home?
- What changes in income do you expect over the next ten years?
- What other consumer debts do you have?
Next, I consider the following and establish a financial profile:
- Job history and stability of income
- Past spending and savings habits
- Use of consumer debt
- Progress made towards saving for retirement
- Stage of life and the anticipated expenses going forward
Based upon the analysis of the above information, I will determine what percentage of your pre-taxed income should go towards a house payment. For most, the range will be somewhere between 25% and 30%. However, in some cases, the recommended amount may be a bit higher or lower. As a rule, all debt payments combined including your house, car, credit card and any other debt payments you have should not exceed the range of 35% – 40% of your pre-taxed income. Although you can likely qualify for more, you should stay within this range to help avoid the financial pain of being overextended.
Call or e-mail to schedule a free consultation with me so I can help you analyze your needs, and determine a home price and mortgage plan that is right for you. By going through this process before you begin the home search process, you can avoid making the mistake of starting the emotional process before you establish your financial boundaries.