How Much You Should Spend on a House

How Much Should You Spend on a House

There is a wealth of information on how much people should spend when purchasing a house. After all, regardless of your situation, a house is likely to be one of the most significant investments you’ll ever make. When so much is on the line, no one wants to make a mistake. However, even with so much information available, it can be hard to navigate this quite important milestone because everyone’s situation is unique. Our suggestions can be tailored to your specific circumstances and used as a guideline when trying to answer the age-old question – how much should you spend on a house?

The current housing situation

If you’re house hunting, it is crucial to understand the current housing situation and how it affects how much you should and will have to pay. You will avoid making a mistake that you will regret by learning more.

The housing market has taken a massive hit in just a year, as inflation rates have risen significantly. According to recent reports, mortgage rates rose 32.0% from March 2021 to March 2022, while median home prices rose by 15.2%. To make matters worse, median family income has fallen by 6.6% during the same period. This is terrible news for anyone wanting to purchase a house. However, don’t lose hope. With proper preparation and knowledge, you will be able to buy a home even in such circumstances.

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Calculate your DTI

You must first consider how much of your monthly income you can safely spend on housing. You must first determine how much money you have to spend each month on other expenses. In different terms, you must calculate your DTI (debt-to-income) ratio. Your lenders will also use this ratio to determine if you will be able to pay off your mortgage successfully.

To calculate this ratio:

  1. Add up your monthly debts, such as your rent, car payments, and school loans. This calculation should not include your grocery bills, taxes, or utility payments.
  2. Multiply this figure by your household income (pre-tax).
  3. Divide this by 100 to get your DTI ratio. If your DTI is greater than 50%, you will have a tough time securing a loan and keeping up with it.

How much should you spend on a house – the calculations

There are several methods for determining how much you should spend on a house. The distinction is in how they determine how much you can afford and should spend. Some of them are more conservative, while others aren’t. Although all of these rules may make your moving anxiety worse and might have you rethinking your decision to relocate, you must stay calm during this period to make the best decision.

The traditional 28/36 rule

This rule states that you shouldn’t spend more than 28% of your gross income on your mortgage payments (including insurance and property taxes). Furthermore, you should spend no more than 36% of your gross income on housing and all other debts. If you want to maximize your chances of securing a loan, your DTI should be less than 36%. This rule allows you to reduce the percentage of the gross income you put toward your mortgage payment to comply with the requirement. The downside of this rule is that it reduces the amount of money available for other purposes, such as vacation savings, investment, or debt reduction. Simply multiply your gross household income by 0.28 to get how much money you should spend on a house based on this method.

The simple 30% rule

According to this rule, your mortgage payments should not take up more than 30% of your gross income (including expenses mentioned previously). What some may consider a great advantage of this rule is that they would be able to afford a more expensive house. However, the most significant downside of this method of determining how much you should spend on a house is that it doesn’t consider how the rest of your funds are distributed. Furthermore, there is no suggested way to alter the rule so that it better fits your budget. This can result in highly restrictive budgets, which most people would find unsatisfactory. Based on this method, multiply your gross income by 0.3 to determine how much money you can set away for mortgage payments.

The most-affordable 25% rule

The 25% rule is an approach that has been shown to work successfully for most people. The only difference between this one and the other rules is that you calculate 25% of your take-home earnings. The disadvantage is that it may be challenging to find a home that fits the budget suggested by this rule, especially in pricey areas. To calculate the amount you should spend on your monthly mortgage, multiply your take-home pay by 0.25.

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Other expenses when purchasing a house

Although these calculations will assist you in determining how much you should spend on a home, it is vital to keep in mind that there are several hidden (and not so hidden) costs associated with homeownership. You should factor in the following expenses when calculating:

  • Down payment
  • Closing costs
  • Insurance
  • Property taxes
  • HOA fees
  • Home maintenance fees
  • Money for furniture

Before acquiring a home, it is recommended that you have roughly 25% to 30% saved for the expenses mentioned above. Saving for a down payment is especially crucial for first-time homebuyers because it will make your mortgage payments easier to manage.

A woman holding some papers for home insurance and a key up towards the camera.

Be wise when making your decision

You may be tempted to choose a rule based on what works for someone else, but resist this temptation. Your situation and someone else’s may be vastly different, so it would be unwise to choose the same method. So, before contacting a reliable moving professional such as State to State Move for relocating your belongings, be sure you can afford your house, live comfortably while paying off your debt, and that you will not be disappointed.

In conclusion

So, how much should you spend on a house? Well, the method you use to decide is highly dependent on your circumstances and requirements. Before determining what works for you, you must consider various factors, such as your debt-to-income ratio and overall way of life. Don’t worry if nothing works for you right now. You may save more money, rent to own, put down a larger down payment, or wait for the housing market to improve.

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