Jeff Rickard

     This is a question that I am asked constantly and with the changes in the mortgage industry “as much as you want” is no longer the answer.  There is a “Credit Crunch” and an “Affordability Crunch” going on today.  In the old days it was banking practice to say you could afford 2 - 3 times your annual income for a home.  In the last few years that “New Normal” was expanded to 5-6 times your annual income, and then we would let you artificially inflate your income.  No wonder we are in a foreclosure nightmare!

     Today we are stepping back to the 2-3 times annual income models.  Cash flow to make your payments is important again, sometimes referred to as qualifying ratios.  FHA has a guideline that your house payment should not exceed 31% of your gross income and that your house payment and all other debt should not exceed 43% of your gross income.  All other debt includes car payments, student loans, credit card payments (revolving debt), loans (installment debt), child support, homeowners association fees, etc.  It does not include public service, phones, insurance, cable, child care (VA does include child care) and other optional costs.

     So, as an example, if you make $4000/month your house payment could be $1240 and your total debt could be $1720.  If you have a $700 car payment you are in trouble. 

     These ratios are guidelines and can be exceeded if you have compensating factors, such as, cash in the bank (reserves), good credit, long job history, no debt at all, a history of expensive rent and other positive factors. 

     The real key to affordability is to not put yourself in a position of being “house poor”.  In other words, all you can afford is your house payment and nothing else.  That makes for a long stressful life. 

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