I knew a young couple who recently have the privilege of finding their first home. They saved up a down payment and then went to visit a real estate agent. The agent showed them all sorts of beautiful homes, but none of them were good enough for them. So they kept looking and found the perfect house, they made their offer, and were able to purchase the house. A few months later, they realized that this house wasn’t so perfect after all, they were spending upwards of 50% of their income on their mortgage, property taxes, and the like! These people bought far too much house!
When purchasing a home, there are some guidelines that you should follow so that you buy a home that you can afford to pay off in a reasonable amount of time, and so that it doesn’t become such a large percentage of your world that you cannot afford to do anything else.
We all know that half of our income is probably way too much, but how much is acceptable? The Federal Housing Administration has guidelines as to how much is acceptable. They use the term PITI, which is the sum of your principal, interest, taxes, and insurance payments. They then compare your PITI with your income, to figure out what percentage of your income you are paying toward your house.
In order to receive a loan from the Federal Housing Administration, your PITI should be between 29% and 41% of your gross monthly income. They will usually demand a lower PITI if you have high amounts of consumer debt. The typical family in North America today makes about $41,000. This means that their PITI would be between $980.83 and $1400.83 If your gross annual income was $100,000 your PITI would be between $2,417 and $3,417.
How do these numbers sound? They are a little high in some financial counselor’s opinions. Best selling author, Dave Ramsey, tells us that we should have no more than a fourth of our take-home pay going toward mortgages on a 15 year fixed mortgage. He is certainly one of the most conservative financial counselors out there, but it does not hurt to err on the side of caution when making a home purchase It’s better to get something you are sure that you can afford, rather than getting a house you might be able to afford if everything goes perfectly.
Don’t buy too much house so that you don’t find yourself in a situation where you have to choose between paying certain bills each month, it’s not a fun place to be, and don’t put yourself there.