Deciding how much house you can afford

Your lender decides what you can borrow. You decide what you can afford.

Lenders are careful, but their qualification decisions are based on averages and formulas. They won’t understand the nuances of your lifestyle and spending patterns quite as well as you do. So, leave a little room for the unexpected. A new home means new reasons to spend money, from furnishings, to landscaping, to repairs.

Historically, banks use a ratio called 28/36 to decide how much a borrower could borrow. An approved housing payment couldn’t be more than 28 percent of the buyer’s gross monthly income. His or her total debt load, including car payments, student loans, and credit card payments, couldn’t be more than 36 percent. With rising home prices, some lenders have responded by stretching these ratios as high as 50 percent. No matter how expensive your market though, it’s important to think very carefully before stretching your budget to such an extent.

When deciding how much you can afford, carefully consider any changes to your financial profile in the next few years. In the long run, peace of mind and security will matter most.