Ratios and Budgets to Help Assess Affordability
Determine what monthly payment you can afford by creating a basic budget that lists your gross monthly income minus long-term debts, plus any special liabilities you might have, like unusually high medical bills.
Start with your gross monthly household income. Many lenders set a ceiling where you can spend no more than 28% of your gross monthly income on principal, interest, taxes, and insurance (PITI). These ratios vary with lenders, however; some may allow your maximum monthly payment to be as high as 33% of your gross monthly income.
Lenders also take into account your other long-term debts such as car loans, alimony, or college loans. They allow no more than 36% of your gross monthly income to be spent on PITI and long-term debts (again, this varies by lender, with some allowing as much as 38%).
These ratios can help you work backwards as well. Let's say you have a monthly household gross income of $6,000. Using the 28% ceiling for PITI, you could afford $1,680 per month.
However, if you pay $600 a month in auto and tuition loans, you could afford only $1,560 for PITI. ($1,560 PITI up $600 long-term debt = $2,160, or 36% of monthly income).
Another rule of thumb is that the purchase price of your home should not exceed four times your annual income. In the example above, your annual income was $72,000, so you might be able to buy a $288,000 home. A $1,560 PITI on a 5% loan is what you'd estimate on a $290,000 loan—greater than you'd need for the $288,000 purchase price minus the down payment.
What Does The Future Hold?
Take a look at the future: Will you need to pay for daycare? Will your family outgrow daycare? Will there be tuition increases? A new car, or repairs on an aging one? Salary raises? No one has a crystal ball, but you don't want to either overextend yourself financially, or buy less home than you can afford. Your Chicago real estate agent will help you assess your personal situation and determine a budget range based on your present and future goals.