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.
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