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Mandy Stacy

How much house can you really afford? A good budget will provide the answer

By Mandy Stacy, Residential Lending Branch Manager

Throughout my 17-year career working with residential borrowers, the first question I’m usually asked during our initial meeting is, “How much house can I afford?” While residential loans have a simple repayment ratio and credit score analysis that’s proven to be effective, the variable that can’t easily be factored into the equation is a borrower’s day-to-day living costs.

The reason for this is simple: While I could approve you for a certain loan amount, that doesn’t necessarily mean you can afford the monthly payment. If you don’t have a budget to track your household and personal expenses, you really have no idea what it costs to live. If you don’t have a budget, how are you managing the dollars you work so hard to earn? Business success depends on operating within a budget, so it only makes sense that households should operate in the same fashion. For this reason, I recommend that households create and stick to a realistic budget at the beginning of each year that includes a built-in savings and investment line item.

An in-depth budget should include how much money is allocated for entertainment, gifts, restaurants, clothing and travel. Budget tools can range from simple Excel spreadsheets to mobile apps you can use on your phone that help you track and categorize each expense. The key is to find the tool you’re most likely to use on a consistent basis.

The next step is ensuring that everyone in your household is onboard with sticking to a budget and committed to working toward a common goal – one that has tangible benefits. If you haven’t created a household budget before, I suggest you brace yourself for some eye-opening surprises. As we review consumer credit reports in loan analysis and see large amounts of credit card and consumer debt, the tough budget conversations far outweigh the results of living without a budget.

One question you may be asking is this: How much of my monthly budget should be allocated to a mortgage payment? We at AgCredit recommend that your monthly housing principal and interest payment, real estate taxes and homeowner’s insurance should not exceed 28% of your gross income. *

Your next question may be: How much total debt can I have and still be eligible for a home loan? This is a much tougher question to answer because total payments ratio guidelines can vary from one loan product to another. In general, however, we recommend that your total payments ratio, which includes your housing P&I payment, real estate taxes, homeowner’s insurance and any additional installment debt and credit card debt, should not exceed 36% to 39% of your gross income. Again, it’s important to note that these are guidelines. Only you know how much money you spend on non-installment-debt for things like cell phones, gas, entertainment, utilities, food, health insurance and medical costs. 

As you review your personal finances, you may realize that your housing or total payments ratio is out of line. If that’s the case, look for opportunities to begin making informed budget decisions so you can contribute more dollars to installment debt or your mortgage payment to reduce those ratios. 

My overall advice is this: Have those difficult conversations, make the tough decisions and take control of your money! You won’t regret it. As the financial guru Dave Ramsey says, “You’ve got to tell your money what to do or it will leave.” The advantage of working with one of AgCredit’s specialized residential loan originators is that we’re happy to discuss repayment ratios and finding terms that will best fit your needs. We’re invested in helping you achieve your long-term goals and success!

* The ratio calculation mentioned above using gross earnings is for W-2 earnings only. Self-employment income is based on a two-year average of net income plus depreciation and interest for each scheduled income tax form (ex. Schedule C – business, Schedule F – farm, Schedule E – rental).

Additional factors taken into consideration on a residential loan approval: Employment history, credit bureau score/repayment history and assets.