How much home can you afford?

by Shawn Carvin, Senior Mortgage Banker

We all want a piece of the American dream, and for many of us the symbol of that dream is home ownership. It implies great things to us — independence, pride, individuality, and a symbol of success.

Most of us start yearning to buy a home as an alternative to paying rent. It’s difficult to escape the feeling that you’re paying for someone else’s real estate investment and future profits. We see desirable homes for sale everywhere we go, and low mortgage rates advertised on TV and online. And we’re tempted. It just makes sense to buy a house.

But does it? You can use one of many online calculators to find out how much house you can afford, or calculate a debt-to-income ratio to figure out how much of a monthly payment you can manage. However, these tools are limited in their ability to project the affordability of a new home, because they are based on national averages that just aren’t realistic here in Los Angeles.

Consider the cost of your lifestyle when deciding how much home you can (really) afford

Your lifestyle has a huge impact on how much home you can afford. Here in L.A., we can’t depend on standard ratios and calculators designed for the “average” American household because we spend money differently. We tend to dine out more, buy nicer cars and clothes, and spend more money on entertainment and recreation. We also drive more (or at least spend more time in our cars with the engine running) than people in other cities, and gasoline is more expensive here. These factors must be taken into account when determining how much home you can afford without making significant changes in your lifestyle.

Hidden costs of ownership impact how much home you can afford

What these tools also won’t show you is how your expenses will change with home ownership. Home maintenance and repair costs can be significant, particularly if you are buying a home that’s 20+ years old. The costs for routine maintenance are fairly predictable, but a house has a way of throwing the unexpected at you – like the replacement of an air conditioning unit or major appliance. And even minor repairs add up – if you’re a do-it-yourselfer, you can save yourself some money by taking care of many problems on your own. But if not, you may have to hire a handyman or contractor to do the work for you.

Preparing for the inevitable rainy day

It’s also important to consider the potential impact of financial stresses when deciding how much home you can afford. A downturn in the economy, a decrease in your income, loss of a job, or major medical expenses are just a few of the “predictably unpredictable” developments which can quickly turn a comfortable mortgage payment into an impossible burden.

Make sure your dream doesn’t turn into a nightmare

The dream of home ownership is attainable, but sometimes we have to take a step back and look at the bigger picture. Otherwise, that dream could become a nightmare of financial shortfalls and maintenance needs that keep piling up. As Stacey Johnson of MoneyTalksNews.com writes, “. . . if you’re buying simply because you want your piece of the American dream, determine what you need (as opposed to want) and spend as little as possible to get it.” That’s sound advice.