Question: Due to the current low housing prices and low interest rates, we're thinking more seriously about buying a house. How do we know what we really can afford?
Answer: The classic guideline for home affordability is the 28/36 rule.
The first part of this debt-to-income guideline says that your monthly house payment -- including mortgage principal and interest, property taxes, and home insurance -- should come to no more than 28% of your monthly gross income (what you earn before income taxes, Social Security, and other deductions come out of your check).
Using this guide, someone grossing $4,000 a month should spend no more than $1,120 (4,000 x 0.28) each month for house payments.
The second part advises that your total monthly debt obligations should add up to no more than 36% of your gross income.
So, for the example of someone earning $4,000 a month, that limit would be $1,440 (4,000 x 0.36), and should cover all debt payments you make each month, including your mortgage or rent, credit cards, college loans, and car payments, for example.
In the past, many lenders were willing to flex these guidelines a bit, both to accommodate low-income borrowers and to allow more for someone in a profession where income is expected to rise. Due to recent economic conditions there is less "flexibility" in applying these guidelines, but they haven't decreased.
Many homeowners have learned the hard way that you're better off buying less than you can afford. Think about it this way -- everyone who has experienced a foreclosure was also approved for a mortgage, so being approved isn't the same as being affordable.
How much house can you afford? Talk to a Coosa Pines FCU loan officer to run the numbers. We may be able to prequalify you for a loan, so you'll know exactly how much house to shop for.