The purchase of a home is a significant event. It will take up as much as half of your monthly income each month. Therefore, you need to make sure that you know how much that you can afford to spend on a home. How do you determine the upper limit to your housing budget?
Spend Less Than 250 Percent of Your Yearly Salary
A good rule of thumb is to spend less than 250 percent of your yearly salary on a home. If you make $50,000 a year, you can spend $125,000 on a home. If you make $100,000, you can reasonably expect to afford a home worth up to $250,000. However, it is important to take into account the housing market in your area. It may be necessary to spend more than that to purchase a quality property.
Keep Your Housing Payment to Less Than 33 Percent of Your Income
Another way to determine if your can afford a home is to figure out how much of your income is being spent on a housing payment. Ideally, you want to spend no more than 33 percent of your income on a mortgage and no more than 45 percent of your income on all of your debts. While this percentage can be stretched in certain cases, it is a good ratio to maintain if possible.
How Much Is a Home Appraised For?
If a home is priced for more than you want to spend, you may be able to say you got your money's worth if the home is appraised for more than the purchase price. This is because you may have instant equity in the home that can be leveraged to pay down other debt. You would also realize an instant profit in the event that you had to sell the home if you could no longer afford it in the future.
How much home can you afford? That depends on how much you make, how much debt you currently have and how much the home itself is worth. To determine if a home is worth buying, you can ask your real estate agent or a mortgage broker for a professional opinion.