How Much House You Can Buy vs How Much You Can Afford

Transcript

This video comes off the heels of another one I just did, where I mentioned: “Hey, pay off debt to get more debt.” Now, we’re going to talk about how much you should actually pay for a home versus what you could pay for a home.

What You Can Afford vs. What You Should Pay

Often, when working on loan applications, I like to tell folks:

• There’s the amount you can be qualified for, and
• There’s the amount you might actually want to pay.

These are two very different worlds.

In the last video, and in a few others you’ll see on our site, we discussed the debt-to-income ratio (DTI) and how it really impacts what you can afford on a home—assuming everything else in the mortgage application is relatively clear.

The DTI is a key metric lenders look at, essentially saying, “How much of your income is going toward debt payments?”

High DTI Ratios: A Red Flag for Your Budget

Here’s a shocker: For mortgages, DTI ratios are often pushed up to 50%, and sometimes even higher for certain loan types, like VA loans. But that’s not always ideal. Why?

If half of your income is going toward maintaining debt, it’s not the best metric for long-term success in your personal budget.

This brings me to an important point: Just because we tell you that you can afford it doesn’t mean you should pay for it month by month.

A Real-World Example

Let’s take an example:

You’re making $6,000 a month and have a 50% DTI ratio.

• This means $3,000 a month is going toward debt.
• That leaves you with $3,000 for all other expenses.

However, that 50% DTI is based on pre-tax income. So, that $6,000 gross income might actually be $5,000 or even $4,500 after taxes, depending on where you live.

Now imagine you have a $3,000 monthly mortgage payment. With only $4,500–$5,000 in take-home pay, you’re left with very little for other living expenses. If you’re trying to save or compound your finances, this situation gets tough quickly.

What’s the Ideal DTI Ratio?

The lowest DTI ratio is, of course, the best. If you’re trying to build wealth, save, and invest, lower is always better.

What’s a good target?

• Ideally, aim for 35% or less.
• Around 35% is where I’ve seen many folks succeed in saving, investing, and managing a mortgage that fits their lifestyle.

If your DTI is higher (e.g., 40–50%), especially with certain loan types like VA loans, it’s worth re-evaluating your situation.

Nuances in DTI Ratios

There are always nuances to consider. For example:

• If someone has a high DTI ratio (e.g., 60–70%), it might be because they’ve left a spouse off the loan application. In most states, you don’t have to count one spouse’s debts against the other.
• This can make the DTI look higher on paper, but the household’s overall financial situation might still be reasonable.

That said, when factoring in all debts, including your new mortgage, it’s best to keep the DTI around 35% or less to ensure long-term financial stability.

Final Thoughts: Do a Budget First

Before buying a home, make sure you do a budget.

• Get a clear idea of what’s comfortable for you.
• If you have high fixed monthly costs (e.g., unique expenses), factor those in.

At the end of the day, buying a home should be a blessing, not a curse. If you’re underwater on your mortgage, it’s not going to feel like an enjoyable experience.

Remember, just because you can afford a certain number doesn’t mean you should go for it. Think about what’s sustainable for your lifestyle.

My name’s Evan Kaufman, your VA loan originator. Take care!