Everyone’s financial state looks different, but it is important to know as much as possible when it comes to your finances. The more you understand, the easier it is to know where your money goes each month.
One great question we get asked a lot is:
“When buying a home should I use my net income or my gross income to figure out how much I can afford?”
What if we told you the answer is BOTH! Confused? We will explain:
First, let’s break down the difference between net income and gross income.
For example, say you make $50,000 a year; This is your gross income. Of that $50,000, you may bring home $1200 a pay period (the time frame you are being paid for); This is your net income.
The number YOU want to focus on to determine how much house you can afford is your net income. If you buy a home solely based on your gross income you could end up being house poor (or not being able to afford anything other than a large house payment). No one wants to live on a super tight budget but so many people fall into this trap!
There are other factors that go into figuring out how much house you can afford such as:
Now that you know some factors that can help you figure out how much house you can afford, look at your budget. If you don’t have a budget, now’s the time to start one! A budget helps you understand your spending and where your money goes each month.
Spending and income rarely look stay the same all year, so it’s a good idea to make a realistic budget each month.
Once your budget is set, make a plan and figure out how much of your budget you’d like to spend on a house each month. Dave Ramsey suggests spending no more than 25% of your net salary while others will suggest no more than 35% of your net salary. Note: Many lenders will let you go up to 40% or more of your income, so just make sure you work with a Home Loan Specialist who knows your short- and long-term financial goals. Don’t assume because you get approved for a certain loan amount that is what you can really afford.