When you’re ready to buy a home, one of the first steps is figuring out your budget.
While your lender will tell you the maximum amount they’re willing to finance, it’s crucial to understand that this number doesn’t necessarily reflect what you can comfortably afford. The difference between what a lender approves and what fits into your lifestyle budget can be significant, and it’s important to strike a balance that allows you to enjoy your new home without feeling financially stretched.
Lenders use a variety of factors to determine how much they’ll lend you. They’ll look at your income, debts, credit score, and other financial obligations to calculate your debt-to-income ratio (DTI). Typically, lenders are comfortable if your monthly debts (including the new mortgage) don’t exceed around 43% of your gross monthly income. However, just because a lender says you can afford a certain amount doesn’t mean that you should spend that full amount.
To find a comfortable budget, start by looking at your overall financial picture. Consider your day-to-day living expenses: groceries, utilities, transportation, insurance, and healthcare costs. Austin’s cost of living can vary depending on the neighborhood, but it’s essential to have a realistic view of your monthly spending.
Don’t forget about social activities and hobbies—these are the things that make life enjoyable and provide balance. Whether it’s dining out at Austin’s amazing food scene, enjoying live music, exploring the outdoors, or participating in sports or arts, these expenses add up. It’s important to ensure that your mortgage payment doesn’t leave you sacrificing the activities that bring you joy and fulfillment.
In addition, consider future financial goals and unexpected expenses. Are you planning to travel, start a family, or go back to school? Do you have an emergency fund for unexpected repairs or medical bills? These considerations should influence how much you’re comfortable spending on a home. Remember, owning a home comes with maintenance costs, property taxes, homeowners insurance, and sometimes HOA fees. These costs can fluctuate, so it’s wise to budget conservatively.
A good rule of thumb is the 28/36 rule: aim to spend no more than 28% of your gross monthly income on housing expenses and keep total debt payments under 36%. This can help you ensure that you have room in your budget for other priorities. It’s also helpful to run your own budget scenarios: use online mortgage calculators to see how different home prices, interest rates, and down payments affect your monthly payment. Then, layer in your other expenses to see what feels comfortable.
