This is one of the most common questions first time home buyers ask me. The answer: everyone is unique, and it will never be a one-size-fits-all solution. An easy calculation the industry uses is called debit-to-income, or DTI. To calculate this, simply add up monthly expenses and divide by monthly income. For example, if your expenses such as car payment, student loans and credit card payment equal $2,500/month and you earn $6,200/month, that means your DTI is 40%. Generally, experts in the industry will say a good DTI target is 40% or lower. DTI limits do range depending on the lender, type of loan and overlays. In many programs, DTI range from 42% up to 56.99%.
But, in my opinion, DTI isn’t a perfect metric. Here is why, if you made $2,000/month and your DTI is 40% that means you have $1,200 each month for other expenses such as insurance, taxes, gas, groceries, medical, cell phone, etc. That may not be enough, especially for a larger family. However, if you made $10,000/month with a 40% DTI, you would have $6,000 remaining to cover all other expenses. That is the same DTI percentage, but a significantly different amount of left-over income each month to cover your financial needs.
I recommend you approach it the old-fashioned way and look at your expenses over the last year to determine what you spend each month on average. You can back into what a monthly mortgage payment would comfortably look like for you. Don’t forget to add in what you save for retirement and savings.
Read the full article, "How much home can you afford?", posted on our blog.
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