Your Buying Power

If you’re in the market for a new home or investment property, one of the first questions you’ll probably ask is, “What can we afford?”

A common misunderstanding is that a home’s list price determines whether or not you can purchase it. But that price doesn’t include housing-related expenses, such as annual property taxes, homeowner insurance, or any maintenance. Remember, you’ll live with your monthly payment, not the sales price.

Therefore, what you should instead ask is, "What is our buying power?"

Buying Power Defined

Your buying power is comprised of the total amount of money you have available each month for a mortgage payment. This means the money you have each month after fixed bills and expenses, as well as any money you’ve saved for a down payment, the proceeds from the sale of your current home (if applicable), and the amount of money you’re qualified to borrow.

Why Buying Power Matters

Once you have clarity on your buying power, you’ll be able to buy the home you want, instead of settling for a home because you feel it’s the only one you can afford.

It will also prevent you from becoming “house poor,” a common term for someone who’s put all their money toward the down payment, leaving them nothing left over for fees outside of their monthly house payment.

Both scenarios can negatively impact the lifestyle you want to live. Understanding your buying power can help you get the home you want without sacrificing the lifestyle you desire.

Calculating Your Buying Power

Buying power is calculated by adding the money you’ve saved for a down payment and/or the money you made from selling your home (minus fees and mortgage payoff) to all of your sources of income and investments that could be used to make your monthly payment.

The general rule of thumb is that your monthly housing costs should be at or less than 28% of your monthly gross income. This number should include your mortgage payment towards your loan principal and interest as well as your property taxes and insurance (PITI).

Use the worksheet below to figure out an estimate of your buying power.

1.	Monthly income before taxes	$
2.	Multiply line 1 by 0.28	X 0.28
3.	Monthly mortgage payment (PITI) should not exceed this amount	= $
4.	Monthly income before taxes	$
5.	Multiply line 4 by 0.36	X 0.36
6.	Total monthly payments on all debts (including mortgage) should not exceed this amount	= $
7.	Subtract the total monthly payments on all outstanding debts (e.g. car loans, credit cards, student loans, etc.)	-$
8.	The monthly mortgage payment should not exceed this amount	$
9.	Look at line 3 and line 8. The lower figure is an estimate of the maximum mortgage payment in consideration of your income and debts	$
10.	Multiply line 9 by 0.80	X 0.80
11.	This equals a portion of your mortgage payment that is the principal and interest only	$