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Deciding How Much House You Can Afford

Deciding how much house you can afford is a crucial step in the homebuying process. While lenders play a significant role in determining how much you can borrow, it’s essential to remember that they don’t fully understand your unique financial circumstances and lifestyle choices. As the homeowner, it’s up to you to assess what you can truly afford, taking into account various factors beyond the lender’s calculations. After all, buying a home involves not only the mortgage payment but also additional expenses that come with homeownership.

In the past, banks and lenders used a standard ratio known as 28/36 to determine borrowers’ borrowing capacity. This ratio stated that the housing payment should not exceed 28 percent of the buyer’s gross monthly income, and the total debt load (including car payments, student loans, and credit card payments) should not exceed 36 percent. In Canada, a similar approach is followed with the Gross Debt Service (GDS) and Total Debt Service (TDS) ratios. The GDS ratio should not exceed 32 percent of the buyer’s gross monthly income, while the TDS ratio should not exceed 40 percent of the buyer’s total debt load.

However, as home prices have risen, some lenders have stretched these ratios to as high as 50 percent. This means that borrowers may be approved for larger mortgage amounts, allowing them to purchase more expensive homes. While it may be tempting to push your budget to the limit, it’s crucial to exercise caution before doing so.

Stretching your budget to the maximum limit leaves little room for unexpected expenses and lifestyle adjustments. Homeownership brings about various additional costs, such as furnishings, landscaping, repairs, and maintenance. It’s important to consider these factors and leave a buffer in your budget to handle unforeseen circumstances.

Here are some key points to consider when determining how much house you can afford:

  1. Calculate your income and expenses: Start by evaluating your current income and monthly expenses. Consider all your financial obligations, including debts, utilities, insurance, groceries, transportation costs, and savings. This will give you a clear picture of your overall financial situation and help you assess what you can comfortably afford.
  2. Determine your housing budget: After assessing your income and expenses, establish a realistic housing budget. Remember that your housing costs should include not only the mortgage payment but also property taxes, homeowners insurance, and potential homeowners association (HOA) fees.
  3. Consider your lifestyle and future goals: Think about your lifestyle choices and long-term goals. Do you have any significant expenses on the horizon, such as starting a family, furthering your education, or retiring? Ensure that your housing budget aligns with your future aspirations and allows for flexibility in your finances.
  4. Account for additional homeownership costs: As mentioned earlier, homeownership comes with additional expenses beyond the mortgage payment. Consider the costs of property maintenance, repairs, renovations, and any desired upgrades. It’s wise to set aside a portion of your budget for these ongoing expenses.
  5. Plan for emergencies: Financial emergencies can occur at any time. It’s crucial to have an emergency fund that can cover unexpected expenses, such as medical bills, job loss, or major repairs. By having a safety net in place, you can protect yourself from potential financial strain.
  6. Seek professional advice: Consulting with a financial advisor or mortgage specialist can provide valuable insights and help you make an informed decision. They can provide guidance based on your specific circumstances and financial goals, ensuring that you are making a responsible choice.

In conclusion, while lenders determine what you can borrow, it’s ultimately your responsibility to decide what you can truly afford when buying a house. Avoid stretching your budget to the maximum limit and consider the bigger picture, including your lifestyle, future goals, and the additional costs of homeownership.

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