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Ask Adam: How Much Home Can I Afford?

by ARLnow.com — June 12, 2012 at 11:00 am 3,115 22 Comments

Editor’s Note: This periodic sponsored Q&A column is written by Adam Gallegos of Arlington-based real estate firm Arbour Realty. Please submit follow-up questions in the comments section or via email.

Question: What percentage of my income do you recommend spending on a home mortgage every month?

Great question. I’m going to defer this response to one of the best loan officers in the business, Paul Nagel:

Even after the mortgage market crash, banks will approve the majority of buyers with good credit for more than they would want to spend on a home. For most loan programs, banks will approve someone to have a mortgage and minimum payments on debts (credit cards, car loan, etc.) at 45% of their gross income. For example, someone with low debts and earning $100,000 may be approved up to a mortgage payment of $3,500 per month.

That said, my SUV might be able to drive 120 MPH, but that doesn’t mean that it’s wise to drive that fast. Said differently, it’s often not the upper limits of what can be done that determines the most prudent course of action.

In terms of looking to purchase a home, any good lender can provide feedback on how much of a mortgage could one be approved for by a bank; however, the more important (and more difficult) question when looking to purchase a home is not what could I purchase, but what price would fit within my personal and financial plans. That’s where it gets very specific to each person’s situation and/or preferences.

I’ve seen people with extremely high incomes purchase very modest homes, as they preferred to go to Paris once a month and eat most meals at fine restaurants. I’ve also seen individuals purchase very expensive homes relative to their monthly income, but their preferred recreation was Netflix at home with family.

The best advice I could give would be to make sure to obtain feedback on two topics from any given lender: First, understand what the approximate upper limit that you would be approved for by a bank. Second (and more importantly), prepare a budget that takes into account your personal and financial plans. A good lender can help you understand how much home that will afford you based on estimated costs of home ownership.

A lender can’t provide a specific answer regarding what to spend, but they definitely should provide enough information so that it’s very easy for you to determine the answer based on your specific goals & plans.

Continue to send your real estate-related questions to: adam@arbourrealty.com

The views and opinions expressed in the column are those of the author and do not necessarily reflect the views of ARLnow.com. Community discussion guidelines: While we encourage a spirited exchange of views in the comment section, comments that are deliberately mean-spirited will be removed.

  • Douglas Parker

    Much more advisable to have a low monthly payment and greater discretionary income for life’s unforeseeables.

    • Arlington, Northside

      One should have a safety nest egg regardless of life style, but the big house and netflixs vs. a small condo and trips to paris is a very good point that usuallly is not discussed when this topic comes up.

      • Tabs

        Paris please.

  • Jason B

    After the mortgage crises, many banks are now requiring 30% down on a house. work out what your down payment can be before you work on monthly payments. Monthly payments first is so 2006.

    To advise on monthly payments without informing on down payment as a factor in today’s environment is disingenuous to the perspective home buyer.

    • Arlington, Northside

      What type of legit lender requires 30%?

    • Hokie

      I have heard of zero banks requiring 30% down, and I bought and refinanced in the last 3 years and know many people who have as well- and they definitely did not have 30%- let alone 20%.

      What bank are you using?

      • Arlington, Northside

        Yep, 5-10% down still seems to be the standard for professionals around here.

  • BreakPause02

    45% gross income seems high.

    I certainly would not want to carry that.

    We’ll use Federal 28% bracket (assume actual tax rate is around 20%) + 5.75% for VA, that’s almost 70% of one’s net wages…I think.

    • Arlington, Northside

      45% is the normal approval amount, not the amount that the normal sane person is going to go by.

      • brian

        if you are making 200k+ a year, 50% isn’t really an issue.

        • drax

          Until you get laid off. But that couldn’t possibly happen.

  • gnarlington

    uhhh 30% down if you have terrible credit (read: shouldn’t be purchasing in the first place).

    Maybe you should think about building an excellent credit history first.

    • KalashniKEV

      Yeah… 30% down is a lot in any market… especially Arlington.

      • brian

        only if you are working at McD’s does this apply.

        • drax

          Really, Brian? 30% of a $500k mortgage is $150K. You have that much cash lying around? Not likely if you’re a first time buyer.

  • Hattie McDaniel

    In the old days it was your mortgage payment shouldn’t exceed 28% of your gross income and your total debt service shouldn’t exceed 35%.

  • AllenB

    This is a very common sense approach to mortgages that is rarely discussed with the borrower. Most just push you to borrow up to your max.

    Glad to see there are some loan officers out there giving out advice like this.

  • JamesE

    0% down, adjustable rate, nothing can go wrong!

    • SomeGuy

      I’m with you, JamesE. Real estate can only go up.

  • Big Bill

    Is this a paid advertisement ?
    Appears to me that ads should be on the ad column
    and not in body of ArlNow.com. Am I missing something.?
    More than glad to report daily real estate columns ifI don’t have to
    pay ad fees?..

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