- A competitive housing market can tempt people to spend more than they should.
- The housing market will wax and wane, but you always want to have enough money left after your housing payment to save for a rainy day.
The primary goal is to leave yourself enough to live a good life.
We'd be lying if we said that now is an easy time to be a house hunter. If there are a dozen other parties lined up to make an offer on every house that appeals to you, you may feel as though you can't compete.
If that's the case, you may be thinking about raising the amount you're willing to pay. Before you do, though, make sure each of these five signs apply to you and your financial situation. If you can answer "yes" to each of these questions, you may be in a position to raise your budget.
1. Will my debt-to-income ratio still be in line if I raise my budget?
Debt-to-income ratio (DTI) refers to the amount of money you shell out each month to live compared to how much you earn. For example, if you earn $80,000 per year, that's $6,666 per month (before taxes are taken out). Let's say the bills you are obligated to pay each month (including mortgage, auto, credit cards, personal loans, child support, and other debts) amount to $2,500 per month. You divide the total of your bills by your income to come up with your DTI. Here's how it would look:
$2,500 ÷ $6,666 = 0.375. Your DTI in this scenario would be 37.5%. Ideally, most lenders like to see a total DTI of 36% or less, and statistics indicate that people with DTIs over 36% tend to run into more financial problems.
Now, here's where it gets tricky. Some mortgage lenders will extend loans to people with higher DTIs. While that's good for their business, you have to determine whether it's good for your financial life. Do the math and if raising your house budget cuts you close, you know now is not the right time.
2. Can I still afford to do the things I love?
If you've ever been house-poor, you know the misery of spending so much money on a mortgage that you don't have the funds left to simply enjoy life. If you have a hobby that means something to you, you want enough left to go out for nice dinners, or dream of travel, pouring everything you earn into a house is likely to get old once the excitement of moving day wears off.
3. Will I still have enough to put away for a rainy day?
One of the most surprising things about being a homeowner is how much you'll pay in hidden costs. You're not just responsible for a mortgage. There's also homeowners insurance, utilities, HOA fees, maintenance costs, and more. Some of those expenses can be planned for, but when your furnace breaks down on Christmas Day and you have to dig deep to pay someone to come out and fix it, you'll want a robust emergency fund available.
Before raising your housing budget, run the numbers. Make sure you'll have enough money put away to get you through emergency situations.
4. Can I still prioritize saving for my future?
No matter your current age, part of treating yourself well is planning for your financial future. For some, that means early retirement. For others, it means an annual vacation to a faraway place. And for many of us, it means a comfortable retirement. Unless you can still invest money in your future self, you may not be ready to raise your house hunting budget.
5. Can I pay the mortgage without relying on anyone else?
Even if you're buying the house with a partner, consider what would happen if that person died or left. Would you still be able to make the mortgage payments until you can make other arrangements (like selling the house or bringing in a roommate)?
If you've answered a resounding "yes" to each of these questions, congratulations. You're ready to raise your housing budget. Just make sure it's your decision and you're not pressured into making a bad decision.
Our Research Expert
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