This is, of course, one of the first questions most of my clients ask when we first talk. Understanding how much house you can afford helps to determine what houses you should even look at. I find that first time home buyers generally underestimate how much house they can afford and veteran homeowners overestimate how much house they can afford, and this has a lot to do with changes in the housing market. So before you start looking at houses, it is important to really ask yourself what your budget is.

And to answer that, you need to consider two things: how much house can you afford, as per underwriting guidelines, and how much house should you afford, based upon your lifestyle and expenses. To answer the first question, you can check out our affordability calculator. Just plug in your income, debts, estimated taxes and insurance, and PMI if you are going to need it. This will give you a pretty good idea of how much house you can qualify for. For a more exact answer, you can also contact a qualified mortgage specialist who can get you pre-approved and tell you how much you can afford.

But the second question is, perhaps, more important than the first. And the reason is that everybody is not the same. Debt to income ratios are determined based upon your credit report, so anything which does not show up on your credit report is not counted. Thus, two people with the same income and the same debts may not actually be able to afford the same payments. Consider, for instance, the working couple who has two children in daycare. Those daycare costs are an additional monthly expense which a family without children or with a stay at home parent may not need to account for.

Things like cell phones, cars or other debts in a spouse’s name, and utilities are also important to consider. A 4,000 square foot house is going to have higher utility costs than a 1,200 square foot house. And if you are qualifying for a mortgage on your own, but pay for your spouse’s debts which are in his or her name, those debts are still going to be there when you buy your house, but will not be factored into your debt to income ratios. Even something as simple as your cell phone plan can make a drastic difference. I recently had a couple from Northville who told me their family plan was over $400 per month. $400 per month for cell phones is a lot of money, and if a single person with a $50 cell phone plan were to be eligible for the same mortgage as this couple, the single person would have an extra $350 per month in income.

For these reasons, it is important to always have a conversation with your mortgage specialist about both what you can afford, and what you should afford.

If you have any questions about how much house you can afford, or about mortgages in general, please contact me so that I can help you. And if you have anything else to add about determining how much house you can and should afford, please leave a comment.