Your lender decides what you can borrow but you decide what you can afford.
Lenders are careful, but they make qualification decisions
based on averages and formulas. They won't understand the nuances of
your lifestyle and spending patterns quite as well as you do. So, leave
a little room for the unexpected - for all the new opportunities your
home will give you to spend money, from furnishings, to landscaping, to
repairs.
Historically, banks use a ratio called 28/36 to decide how
much borrowers could borrow. An approved housing payment couldn't be
more than 28 percent of the buyer's gross monthly income, and his or her
total debt load, including car payments, student loans, and credit card
payments, couldn't be more than 36 percent. (In Canada lenders apply
similar formulas to determine how much a buyer can afford. The Gross
Debt Service ratio, or GDS, is not to exceed 32 percent of the buyer's
gross monthly income, and the Total Debt Service ratio, or TDS, is not
to exceed 40 percent of the buyer's total debt load.) As home prices
have risen, some lenders have responded by stretching these ratios to as
high as 50 percent. No matter how expensive your market though, we
urge you to think carefully before stretching your budget quite so much.
Deciding how much you can afford should involve some
careful attention to how your financial profile will change in the
upcoming years. In the long run, your own peace of mind and security
will matter most.
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