Deciding How Much House You Can AffordScott Peterson

Your lender ultimately decides what you can borrow, but you decide what you can afford.

Lenders are careful, but they make qualification decisions based on averages and formulas. They won’t understand the nuances of your lifestyle and spending patters quite as well as you do. It’s important to leave a little room for the unexpected, including all of the new spending opportunities your home will provide for you: furnishings, landscaping, repairs, etc.

Historically, banks use a ratio called 28/36 to decide how much borrowers can borrow. An approved housing payment couldn’t be more than 28 percent of the buyer’s gross monthly income, and his or her total debt load, including car payments and student loans, In addition, credit card payments couldn’t be more than 36 percent.

Today, some lenders have responded to rising home prices by stretching these ratios to as high as 50 percent. No matter how expensive your market is though, I urge you to think carefully before stretching your budget quite so much.

Deciding how much you can afford should involve some careful attention to how your financial profile will change in the upcoming years. In the long run, your own peace of mind and security are what matters most.