When you think about how much you can afford to pay, don't leave yourself with empty pockets.
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Kevin McCormally: I am Kevin McCormally of Kiplinger's and I am here with Pat Esswein, Associate Editor of Kiplinger's Personal Finance magazine to talk about Home Buying. Pat, how much consumer want afford to pay for the house they want?
Pat Esswein: Well, the conventional rule that lenders abide by is that you can spend is the 33-38 rule, and what they mean by that is you can spend upto 33% of your gross household income on your mortgage, property taxes, hazard insurance, and you can spend a maximum of 38% of your gross household income on all debt payments.
Kevin McCormally: Okay, so under that rule, if I have a $100,000 of earnings before taxes, I can spend $33,000 of that to own housing?
Pat Esswein: Right, and upto $38,000 annually on installment debt.
Kevin McCormally: Do all lenders stick to these rules?
Pat Esswein: Yeah, pretty much, but they may be more restrictive, they might allow you to borrow less if you are, for instance, self-employed and have sporadic income, or if you are buying a condominium , or if you are buying this property either as a vacation home or as an investment property.
Kevin McCormally: Okay, do you think people are stretching too far. I mean, is there a danger that people would stretch too far to buy too big of a house, too expensive of a house?
Pat Esswein: Yes, the conventional wisdom is that it's always good to stretch as far as you can because you are using -- you are applying leverage, you are using borrowed money, somebody else's money to invest but there is a big quality of life issue. If you stretch absolutely to the max, will you be able to make more than the minimum payments required in your credit cards? Will you be able to take the vacation that you would like to take with your family? Will you have a house that's bigger than you want to clean?
Kevin McCormally: Okay, that's a good point Pat, thank you. Page 1 of 1