We’re going to look at how much you can afford to spend on housing in 3 steps!
In the longest recorded bull run in history, we have experienced massive growth in home values. No, this is partially due to how much they plummeted during the last downturn but also due to the demand for housing. Now the whole multiple offer situation, bidding up the asking price, waiving inspections, and appraisal is nothing new, depending on the metropolitan area you live in. But the last 18 months have only further exacerbated this, whereas we have seen a whole new definition of home and the desire of so many to move from crowded cities to spacious suburbs.
Now you could be in the market to buy or rent a home, townhome, condo, or rent one of these spaces or an apartment. Whether you rent or buy, it’s important to know how much you can afford to spend before you begin looking.
I cannot tell you how many people I talk to who find their dream home only to be let down by the fact that they cannot afford it!
Get prequalified before you start looking; this will ensure you are not wasting your time or your broker’s.
Now you may be familiar with what lending institutions typically go by when qualifying you for a mortgage, and you’ll often hear 36% of your gross income thrown around.
You may also hear someone like Dave Ramsey speak of 25% of your net income. No matter what methodology you follow, it would help if you determined what it is that you want out of life so that you ensure that your housing does not inhibit you from pursuing that.
You may also be familiar with multipliers used to determine whether you qualify for a rental, like hearing 3X rent in income per month.
Now I go back to vision, goal setting, and benchmarks a lot in Margin. I believe so many people inadvertently continue to remove margin from their lives by the act of purchasing or renting a place they have no business agreeing to. Now, people are often ignorant and don’t know what should be spent on the basic mortgage or rent, not to mention all of the other costs that go into the purchase of a dwelling.
So what steps should you follow in order to determine what
Step 1: What is your income?
For simplicity, let’s take a look at your take-home pay. What is your pay after tax and deductions?
Step 2: What are your expenses?
If you have a plan to spend or a budget, you should be able to easily identify how much you spend on a monthly basis. Take that total and subtract out any current housing costs.
Step 3: How much discretionary income do you have?
Once you take your income minus your expenses, you will have your so-called discretionary income. Now, of course, if you buy a house or rent an apartment, you’ll have either a downpayment and closing costs, or you will have a damage deposit and maybe first and last month’s rent to factor in, in order to get into either of these spaces.
Once you have this discretionary figure, you should ask yourself a few questions. Are the items that currently make up my expenses necessary, and do they add value to my life?
Once you can answer these two questions for your expenses, you’ll have a better idea of what seemingly mindless purchases we make, such as a subscription, what your ‘needs’ actually look like, and how to limit the wants to only those that truly add value to your life.
At this point, you will know what’s leftover. You can then compare what’s left over to what aspects of life need to be added in, such as additional savings for a trip you want to go on.
You may even consider backing this out by taking your take-home pay, determining a percentage you are comfortable with, then seeing if you can accomplish your other goals if you proceed with buying or renting the place that you have in mind.
CTA:
My call to action is to calculate a percentage of your take-home pay that you can spend on housing that will still allow you to accomplish the other goals and benchmarks you have to accomplish.
