You're looking to buy a new home and running all of the numbers, but you're worried about accidentally buying more home than you can afford. Fortunately, there are a few ways to tell.
First off, many industry professionals simply use 28 percent as their guideline. First, take all of the money you make every month. Then look at the cost of your mortgage. Be sure to include everything, from the principle payment to the insurance to the escrow accounts. The total you get shouldn't be more than 28 percent of your earnings.
One thing to watch out for is a homeowners' association (HOA). This can add a monthly cost. If you max out the 28 percent to buy the house, you're really over it with the HOA fees tacked on. Some do point out that your total debt shouldn't be over 36 percent, but this still gives you a rough guideline to shoot for.
Now, one other thing to remember is that the future is unpredictable. What if you buy a home that takes up 28 percent of your income, but then you can't sell your old home, and now you're putting 40-45 percent toward two houses? What if you lose your job, or your spouse does, pushing your total income down significantly?
You can't plan for these things, per se, but there is some danger in buying the most expensive house that you can, giving you very little leeway when something happens. That is often what leads people to foreclosure. If that happens to you, be sure that you know about all of your legal options, especially those that may help you stop foreclosure.
Source: The Motley Fool, "How to Know if You're Buying Too Much House," Daniel B. Kline, accessed May 19, 2017