How much home can I afford to buy?

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.  

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