The main goal is to leave you enough to live a good life.
- A competitive housing market can encourage people to spend more than they should.
- The housing market will go up and down, but you still want to have enough money after your housing payment to save for bad weather.
We would be lying if we said that it is now easy to be a house hunter. If there are a dozen other parties lined up to bid on every home you like, you may feel like you can’t compete.
If so, you may be considering increasing the amount you are willing to pay. Before doing so, however, make sure each of these five signs applies to you and your financial situation. If you can answer “yes” to each of these questions, you may be able to increase your budget.
1. Will my debt to income ratio still be in line if I increase my budget?
The debt-to-income ratio (DTI) refers to the amount of money you spend each month on living compared to what you earn. For example, if you earn $80,000 per year, that’s $6,666 per month (before taxes). Let’s say the bills you’re obligated to pay each month (including mortgage, car, credit cards, personal loans, child support, and other debts) total $2,500 per month. You divide your total bills by your income to get your DTI. Here’s what it would look like:
$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 a DTI above 36% tend to experience more financial problems.
Now, this is where it gets tricky. Some mortgage lenders give loans to people with higher DTIs. While it’s good for their business, you need to consider whether it’s good for your financial life. Do the math and if increasing your home budget is cutting you off, you know it’s not the right time.
2. Can I still afford to do the things I love?
If you’ve ever been housing 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 over to go out for nice dinners or dream of traveling, pouring everything you earn into a house is likely to get old once the moving day excitement will have dissipated.
3. Will I still have enough to store for a rainy day?
One of the most surprising things about being a homeowner is how much you’ll pay in hidden fees. You are not only responsible for a mortgage. There is also home insurance, utilities, HOA fees, maintenance fees, etc. Some of these 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 and fix it, you’ll need a solid emergency fund on hand.
Before increasing your housing budget, calculate the numbers. Make sure you have enough money aside to deal with emergencies.
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 somewhere far away. And for many of us, that means a comfortable retirement. Unless you can still invest money in your future self, you may not be ready to increase your house hunting budget.
5. Can I pay the mortgage without depending on someone else?
Even if you’re buying the house with a partner, think about what would happen if that person died or left. Would you still be able to make the mortgage payments until you could make other arrangements (like selling the house or bringing in a roommate)?
If you answered a resounding “yes” to each of these questions, congratulations. You are ready to increase your housing budget. Just make sure it’s your decision and you don’t have to make the wrong decision.
A Historic Opportunity to Save Potentially Thousands of Dollars on Your Mortgage
Chances are interest rates won’t stay at multi-decade lows much longer. That’s why it’s crucial to act today, whether you want to refinance and lower your mortgage payments or are ready to pull the trigger on buying a new home.
Ascent’s in-house mortgage expert recommends this company find a low rate – and in fact, he’s used them himself to refi (twice!). Click here to learn more and see your rate. While this does not influence our product opinions, we do receive compensation from partners whose offers appear here. We are by your side, always. See The Ascent’s full announcer disclosure here.