How Much House Can You Afford in Denver?

When your parents bought their first home they were
likely encouraged to stretch as far financially as they possibly could. 
Today, potential homebuyers are still pushed into mortgages bigger than they can
handle based on this old-fashioned advice.  However, there have been
several changes that have occurred over the past 30 or so years that now make
this practice dangerous to the dream of home ownership:

Cessation of inflation.  Rapidly rising prices in the 1970’s and early 1980’s meant you could
count on hefty annual raises.  Today, you can’t rely on double-digit income
boosts to make your mortgage payment less of a burden each year.

Predominant two-income couples.  A generation ago, it was much more common to have one
breadwinner in the family.  If they lost their job, the other spouse could
go to work to save the house.  Today, it is more likely that both spouses
must work to support the household, leaving no one on the sidelines to pick up
the slack if needed.

Looser lending industry.  It used to be much harder to get a mortgage for more than you could
actually afford.  Today, thanks to creative financing and relaxed lending
criteria, it is quite commonplace.

Greater necessity for retirement planning.
 30 years ago, a larger portion of the
workforce was covered under traditional, defined-benefit pensions. 
Therefore, they didn’t have to save massive amounts of money on their own to
have a decent retirement.  Today, it is up to you to make sure you are
prepared by sufficiently funding your 401(k)s and IRAs.

So what can you afford?  The more conservative in
the mortgage industry suggest capping your total outlay for mortgage payment,
homeowners insurance, property taxes and mortgage insurance (if you need it) at
25% of your gross monthly income.  They also recommend that when you add
this amount to your total debt
payments, you don’t exceed 36% of your gross monthly income.  If your total
debt will push you over this amount, you should consider paying off some debt
before you purchase a home, or reducing the size of the mortgage you are
considering. 

Keep in mind that 25% is just a guideline, and every
situation is unique, so factor in special circumstances.  You may want to
go lower than 25% if you plan to have children, have an expensive hobby you
don’t want to give up, or if your income varies considerably.  You may,
however, be able to stretch beyond 25% if you’re relatively debt-free, you don’t
have to worry about contributing to your retirement, or you know your income
will climb steeply in coming years. 

Ultimately, you have to decide what will work for your
situation.  At the very least, a too-big house payment will leave you with
too little money for other goals:  college funds, vacations or
retirement.  At worst, it can leave you vulnerable to foreclosure and
bankruptcy.  Don’t rely on your realtor, loan officer, family or friends to
tell you what you can actually afford.  You have to make that decision
yourself, based on your finances, your future obligations, your goals and your
risk tolerance.

If you have any questions or want to get pre-approved,
please call me at 303-696-6933.

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