When it comes to buying a home, your lender determines what you can borrow, but you should decide what you can truly afford. Lenders use averages and formulas to make qualification decisions, but they may not fully grasp your unique lifestyle and spending habits. To ensure financial security and peace of mind, here are some important considerations as you decide how much house you can afford.
1. Leave Room for the Unexpected
While lenders have specific ratios for affordability, like the 28/36 rule in the United States, remember to leave room for unexpected expenses that come with homeownership. Whether it’s buying furnishings, landscaping, or making repairs, these costs can add up. Be prepared for the financial responsibilities that come with owning a home.
2. Understand the Ratios
Historically, banks have used ratios like 28/36 to determine borrowers’ limits. This means that your housing payment shouldn’t exceed 28 percent of your gross monthly income, and your total debt load (including car payments, student loans, and credit card payments) shouldn’t exceed 36 percent. Similar formulas are applied in Canada. Be cautious about stretching your budget too thin, especially as home prices rise.
3. Consider Future Changes
Think about how your financial situation might change in the coming years. Anticipate factors like changes in income, family size, and unexpected expenses. Prioritize your long-term financial security and peace of mind over stretching your budget to the limit.
In the end, while your lender provides guidance on borrowing limits, your financial well-being and comfort should be paramount in your decision-making process. Owning a home is not just about the mortgage; it’s about maintaining a stable and secure financial future.
