Now that you're ready to make that big decision and start shopping for your new house, it's time to reflect on just how much house you can afford. While most financial institutions subscribe to the 28/36 rule as a standard to follow, the more general 30 percent guideline proves to be a good industry standard too.
So what does the 28/36 rule mean? Simply put, your new home mortgage should not exceed 28 percent of your monthly net income. The 36 reflects all of your combined debt, which includes your new mortgage too. The 30 percent rule allows you to borrow a little bit more, yet does not include any of your other monthly debts.
So here's the break down. If you earn 2000.00 net each month, your total debt should not exceed 36 percent or 720.00 per month with your new mortgage included. This shows just how important it is to reduce your miscellaneous debt prior to applying for your new loan. This will enable you to afford your dream house that is priced just out of reach. A factor that also must be entered into this equation is the associated costs that go along with your new house. Property taxes, homeowner dues, and house insurance become real monthly debt that you will have to address. Don't forget unexpected maintenance costs with your new house that are sure to spring up too.
This is a good time to reflect on how much savings you have and also it's a good idea to factor a savings percentage into this formula. You will need to have a savings account with at least enough to cover a few months' expenses in the event that you lose your job or become ill. Many experts advise saving 10 percent of your monthly income as a buffer to let you weather any storm that may come. Purchasing a home with little or no savings, coupled with pushing the envelope beyond the 30 percent rule is a sure way to fall into the abyss of foreclosure, so be prepared before you purchase.
Now that you know how much you qualify for why not contemplate on just how much house you really need to be happy. Exercising moderation and temperance regarding the amount you finance may help give you the peace of mind that comes with a smaller payment, along with the ability to pay off your home a bit early too.
Have fun shopping but just remember the rules!
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