Real Estate Search Direct

That’s exactly what Ivana Newhouse asked the mortgage broker,  “I want to buy a new house – how much can I afford?” 

Ivana was planning to buy a house with her fiancé, Homer Buyer.  She wanted to start looking at properties right away, but there were so many on the market.  She wanted to find out how what she could afford to buy. 

When she gave the broker information on their income, cash for a down payment, debts and credit scores the broker came up with a figure of $480,000.  Ivana was very pleased with that number.

But then she asked what the monthly payment would be for a $480,000 house.  He told her it was about $2500.  Ivana didn’t understand this.  She had sat down with Homer the night before and they had made a budget.  Their budget only allocated $2000 for a mortgage payment.

She asked the mortgage broker, “How did you come up with those figures?”


He explained that the underwriters have strict guidelines of the debt to income ratios used to determine what you are capable of paying. 

They allow a mortgage payment of 29% of your total income and a total debt payment of 41% of your income for FHA loans. 

They base this debt to income ratio on the total debt payment obligations with respect to the total income.  But when they consider the total debt they base the obligation on the minimum payments. 

Homer and Ivana’s budget was calculated to  pay down their credit card debt and student loans quickly.  They planned to pay about 3 times the minimum payments until the debts were paid off. 

If they made only the minimum payments it would take about 20 years to pay off their non-mortgage debt.

They also planned to have 20% of their income invested for retirement, 10% invested for children and children’s college funds, 5% for a vacation fund and a  10% gift fund.  When they added in 25% for their living expenses, they only had 30% available for debt payments (10% for credit card debt and 20% for mortgage).  

If they followed the mortgage broker’s guidelines they could end up buying a house that was much more expensive than they had planned.  They would be able to afford the payments by the standards of the lender, but some of their other long range plans would have to suffer.

They figured that a mortgage was a long term commitment, so they should include other long term plans before they made the commitment.  It would be too late to change once they had 41% of their income committed to long term debt.

So if you are thinking “I want to buy a new house – how much can I afford?”  you are the only person who can answer that question.  Nobody else knows what your long term plans and your priorities are.

If you are going to make a long term commitment to a mortgage, you should come up with your own guidelines that include long range plans for your future.

You don’t want to buy the house of your dreams only to find out that you can’t afford any of your other dreams because of it.

You should start by creating a budget.  If you are having trouble setting long term financial goals or creating a budget, Money Tree budgeting software can walk you through the process step by step.  You can find out more about Money Tree budgeting software here.

Allen Davis
RealEstateSearchDirect.com