When you start looking for your dream home the first thing you should consider is affordability. Buying a home is one of the biggest financial decisions you’ll ever make. You must know how much home you can comfortably afford and it’s best to know this before you start looking. Failing to do this will lead to disappointment if you start looking at homes outside your price range. You can use the 28 36 rule to see how much money you’re able to spend on a home that will leave you in a comfortable position financially.
Defining the 28 36 Rule
The 28 36 rule is useful in determining how much money you can afford to spend on your home. This will allow you to only look at homes within your spending range. The rule is used by lenders to determine what you can afford. The rule takes into consideration household expenses and total household debt. Household expenses shouldn’t exceed 28 percent of your gross monthly income. Household debt shouldn’t exceed more than 36 percent of your gross monthly income. Simply stated, if your household expenses and debt are at or below 28/36 then you should be able to afford the home.
Household Expenses
The 28 36 rule states household expenses shouldn’t exceed 28 percent of your gross monthly income. Therefore, the rule takes into consideration pretax income. Household expenses include expenses such as your mortgage, mortgage insurance, mortgage interest, real estate taxes and property owners’ fees. If these expenses are more than 28 percent of your gross monthly income, then you’ll likely struggle to make your mortgage payments each month.
Household Debt
Household debt is a significant consideration when you are thinking of buying a home. The rule states that household debt should be at or below 36 percent of your gross monthly income. It is basically your debt to income ratio. To determine the ratio, you simply divide your monthly debts by your monthly income. Anything at or below 36 percent means you should be just fine with paying your monthly mortgage obligation.
Conservative is Best
It is possible that when you find a home that you’ve fallen in love with, you will try to justify it’s cost and fool yourself into believing it is a sound financial decision. Buying a home is an emotional process. You’ve likely waited years for this moment and have envisioned what homeownership would be like. Excitement about the possibilities can cloud your judgment. When looking at the numbers and the 28 36 rule, it is best to be conservative. Leave yourself a little financial breathing room. The last thing you want is to be financially drained from making a mortgage payment that you really couldn’t afford in the first place.
Get Advice From a Mortgage Professional
A mortgage professional can walk you through the homebuying process and help you make sound financial decisions. The mortgage professionals at Potempa Team will be happy to assist you in applying the 28 36 rule so you’ll know exactly where you stand when searching for your dream home and applying for a mortgage. Let us be there to guide you in making the biggest financial decision of your life. Give us a call today to see how we can help you make your dreams come true.
