One of the biggest mistakes you can make in the world of real estate is biting off more than you can chew. That is, buying more Austin house than you can afford. While determining how much house you can afford is not an exact science, there are some guidelines to keep in mind when shopping for homes in Austin.
The 28/36 Ratio
Most mortgage companies and other lenders apply what’s called the 28/36 ratio when determining how much house you can afford. They typically require the monthly mortgage payment to represent less than 28% of your monthly income. Mortgage lenders also like to see all of your monthly debt obligations combined (including your mortgage), represent less than 36% of your income.
Obviously, some lenders are more liberal with these ratios than others. If you are looking to make a frugal real estate purchase, you may want to apply your own limits – such as being debt free before purchasing a home, and keeping the mortgage payment less than 25% of your take-home pay after taxes. This will mean you will be able to afford less house, but that is not necessarily a bad thing.
Plan For The Worst Case Scenario
Often when people are looking for a new Austin home they apply the best case scenarios from their budget. For instance, let’s assume Jack and Mary are looking to buy a house. They both work, and earn a combined $150,000 a year. They have no kids, and no debt. They both drive older model, paid-for cars. Based on this $150,000 annual income, and the fact they are debt free, they could afford to buy a very expensive house, according to most lender’s mortgage guidelines.
However, what Joe and Jill are not accounting for is the time when Jill becomes pregnant and wants to stay home with the baby. Joe’s older car starts giving him trouble, and because of his commute and the need for a reliable car, he suddenly finds himself in the market for a newer car. Suddenly, their annual income drops 60% and they have to take on a car payment. Now that $2,700 mortgage payment looks nearly impossible to maintain, even though the lender qualified them for it just two years ago.
Things change; life throws us curveballs. Far better to anticipate those things ahead of time and plan for them by being more conservative at the buy. If Jack and Mary had found a more modest Austin home with a $1,500 mortgage, they could continue living in the home, despite the hit to their income and other setbacks. When planning your financial future, don’t always assume the best case scenario. Hope for the best, plan for the worst, and live your financial life somewhere in the middle.