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Looking at your debt-to-income ratio now can keep you from being ‘house poor’ later

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What mortgage payment feels right for you? You can look to your debt-to-income ratio to help determine that.

A general guideline to use when applying for a mortgage loan is to stay below a maximum 43 percent debt-to-income ratio. That means no more than 43 percent of your gross monthly income goes to your mortgage, credit card payments, car loans, student loans, etc.

Lenders want to know you’ll be able to make your monthly payments. Each person’s situation is unique, however, and you could still qualify for a loan even if the ratio is higher.

People often want to know the maximum amount of house they can qualify for and reach for the limit. There’s nothing wrong with that as long as nothing changes to negatively affect your income. It can be wise to consider keeping wiggle room in your debt load for any unexpected changes in your finances, such as losing a job or having to financially cover a crisis out of pocket.

Changes like that could lead you to becoming “house poor,” where the amount of your income going toward housing (mortgage, property taxes, maintenance and utilities) forces you to change your lifestyle. Or, it forces you to pay for that lifestyle through something other than your income, such as borrowing money or using credit cards.

You also might want to consider some long-term planning when deciding whether a monthly mortgage payment is right for you. Ideally you’re in a career where you’ll advance and generate more income over time. But will your raises increase enough to cover other goals, such as starting a family or adding to the one you have? Are you planning to purchase more vehicles three, four or five years down the line? Are you willing to make sacrifices to be able to afford your home?

Our experienced local lenders can help you to consider the whole picture so you don’t lose sight of where your financial life might take you. We often suggest looking at your budget to consider what makes a comfortable payment for you, then put that amount aside every month to see if it fits your lifestyle or if you find yourself adjusting to accommodate it.

You want to ensure you don’t reach the point where you have to consider selling the home because you can no longer afford it. If this is a first home, it might make sense to aim for a lower mortgage payment now and achieve the more expensive dream home later.

Don’t hesitate to ask us for advice whether you’re in the market for a home or just curious about the process. We’re here to offer trustworthy guidance so you can be a better-informed homebuyer. Also, you can lean on our knowledge and experience to help walk you through the options that best fit your situation. It’s an easy conversation and one we’re happy to have with you.

When you’re ready to buy a house, we want you to be able to buy that house with confidence, peace of mind and a complete picture of what to expect.

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