Real Estate Tips

How Much Should a Family Pay for a Home? (Part 1)

The question of how much a family can afford to pay for a home is not answerable by a simple ratio. Yet, it is very common, and too often very misleading, for bankers or real estate brokers to use such crude rules of thumb as “two and half times income”. Another common recommendation is to spend no more than 25% of income for housing.
The facts are that sound and satisfying homeownership can and does exist over a very wide range of ratios between income and the financial measures of housing cost. The only satisfactory answer to this question requires, as a first step, an evaluation of all family obligations other than housing and a determination of the residual resources in assets and income which are available for housing.

With such an estimate, it is possible to calculate how much of a debt can be supported and thus how much total capital, equity investment and borrowed funds can be assembled for home purchase. The three fundamental dimensions of the home investor’s financial situation which influence the financial arrangements which he can make for home purchase are

Assets: The nature as well as the amount; the ease with which they can be converted into cash by sale or as collateral for a loan with a minimum of delay and cost; the present rate of return on invested assets; potential cash in form of a gift or loan from friendly sources.
The amount of his assets will determine the upper limit of his down payment and the nature of the assets and his obligations will affect his decision on how much of his assets should be converted into cash for home investment and what should be kept intact for other purposes.

Earning Capacity: The present rate of family earned income; stability, dependability and trends of earnings all determine what can saved for home purchase. The present level of earnings will indicate the level of outlays on the home which can be supported but the prospective trends in earnings will help to determine an appropriate long-range pattern of payments.

Obligations: Debts, contractual payments and present and prospective family expenses are all items of obligations worthy of considerations. Present and prospective financial and family expense obligations will be factors in determining the amount of assets and income available for housing