I am going to start a series of Smart Michigan home buyer tips. I will start the series of home buyer tips of “What can you afford in a house payment?” There are three bad things that can happen to you when you buy a home.
1.) Buy a money pit – where you have to keep dumping money into the home because there are structural, environmental, or health issues.
2.) Over pay for the home where you will be upside down in the home for many years to come.
3.) Buy a home that stretches your budget and you become house poor. This is what we are going to talk about in todays series of smart Michigan home buyers.
Over the past 17 years in my career as a real estate agent I have seen too many Michigan home buyers over extend themselves when buying a home. I see it from blue collar workers and I have even seen doctors do it. I saw a doctor recently buy a 1.5 million fixer upper with 6 bedrooms. They had one child. The house was too big and they are stretched to the max. I honestly do not know how they are going to afford fixing up the home. Many people have asked me so how do you know what you can afford when buying a Metro Detroit home? It doesn’t matter whether you are buying a home in a subdivision or a lake home near metro Detroit knowing what you can afford over time will help you. Like so much of America….. keeping up with the Jones or status or what you have or show is sometimes taken as a person’s success or wealth when that may not be true at all. Just because somebody buys something on credit does not mean they can afford it. The buyer of the Land Rover or the luxury estate home may not have the reserves to hold onto the car or home when bad times come. In our local Michigan economy we have ups and downs due to the automotive industry. We have business’s closing, layoffs, and job transfers. In life we have ups and downs such as health issues, children, and divorces. These items sometimes affect our financial wealth and what we can hold on to.
So how do you figure a budget for your next Metro Detroit home purchase? Years ago they used to use 25% and 28% of your income for a house payment. They look at the total debt ratio. Usually the lenders and Fannie Mae likes it to be 43% of your income and sometimes they will allow it to be 50% of your income if you have high credit scores or cash reserves. So if you make a combined total income (you and your spouse) of $80,000. $80,000 divided by 12 months gives you a monthly income of $6,666. So ideally you do not want your house payment to be more than 28% of your $6,666 monthly income which is $1,866 a month. Remember this number will include property taxes, home owners association dues, and home owners insurance too.
The second part of the debt ratio equation is the total debt ratio. It is all of your debt added up including the house payment versus your income. Some of the recent graduates from college are having problems qualifying for a home loan because of student loans. Most lenders want you to be near 43% though they will let it go to 50% if you have an excellent credit score or cash reserves. Let’s say you have a lease payment of $200, a truck payment of $400, and two credit card minimum payments of $350. So add those four payments up and it is another $950 a month in debt. Add the $950 to a $1866 house payment you would be under the guidelines of 43% of your income because the $950 and $1866 add up to $2816 which is 42.2% of your monthly income. So that should be a comfortable living according to the bank. The bank or lender will usually qualify you for more than you should or want to go.
You do not want to make any of the three mistakes above because you may pay for the mistake for years to come. Remember it smart not to get yourself into too much debt or too much house. You could end up being house poor. You do not want to live for your house. You want to be able to go on vacations, save for college for the kids, go out to eat and enjoy life with out being buried in debt to a house. You don’t want a $4000 a month house payment because you have not other debt even if it is only 40% of your income. But it is your right and privilege to buy a house that big. I want my clients to be able to afford their home in the good times and bad. I would love for them to be able to save money even with their house payments.
So if the bank will approve you for more money that you may comfortably afford what should you do? How do you figure out what you can afford? Do a budget is a good step to take. Look at your current expenses. If you are currently making a $1000 a month rent payment and wish to buy your first home at $1500 a month….That is an $500 a month increase. Try living for 6 months without the extra $500. Put it into a savings account each month. You would have an extra $3000 to put down on the house. Did living without the $500 a month stress you out? Were you living paycheck to paycheck with out it? Well then maybe you should lower your house payment so you have more flexible spending money. You can do the same thing when renting. Put the supposed increase in housing expenses in a savings account. It will help you determine what you can truly afford.
I hope this first article in Russ Ravary’s Smart Michigan home buyer tips – What can you afford in a house payment? helps you make a sound decision when buying a home. That is the goal. As your realtor I hope to make your next home purchase a good financial move. Feel free to email me at firstname.lastname@example.org or call me at 248-310-6239 to start on your home search.
DON’T FORGET ABOUT THE HOME BUYER BONUS!!! Why settle for a small bottle of wine or a small gift basket when you can get a kayak, or a grill, or a snow blower. When you buy and close on a home with me as your realtor I will buy you a nice gift like that (up to $500 in value).
Do you really want to be a Detroit Landlord? Here are a few more home buyer tips on how to prepare to buy a home. It’s never too early to prepare. What not to do in the months before you buy a home. In fact one of the first things you need to start thinking about is a pre-approval letter. If you do not know What’s a pre-approval letter then here is the answer.
My quote of the day
The big secret in life is that there is no big secret. Whatever your goal, you can get there if you’re willing to work. Oprah Winfrey