How to Determine Your Borrowing Ability and Affordability When Buying a House as a Veteran or Military Homebuyer

Buying a house is a significant investment that can have a profound impact on a person's financial future. As a veteran or military homebuyer, you have unique challenges and opportunities when it comes to buying a house. Understanding your borrowing ability and affordability is critical, as it can help you make a sound investment decision. In this blog post, we will discuss how borrowing ability and affordability go hand-in-hand, what the 28/36 ratio is, how to consider stretch ratios and future financial changes, and how to make a sound decision when buying a house.

Section 1: What is the 28/36 Ratio?

The 28/36 ratio is a guideline followed by most lenders to determine your borrowing ability. The first number in the ratio (28) indicates the maximum percentage of your gross monthly income that can be used for housing payments. The second number (36) indicates the maximum percentage that can be used for housing payments and all other debts. For instance, if you earn $5,000 gross monthly income, your maximum allowable monthly housing payment is $1,400 (28% of $5,000), while your maximum allowable monthly housing payment plus other debts is $1,800 (36% of $5,000).

The 28/36 ratio is an essential factor that lenders use to determine your mortgage affordability. If your ratio is higher than 28/36, you may find it hard to get approved for a mortgage. It's crucial to keep this ratio low to ensure that you don't overextend yourself financially.

Section 2: Stretch Ratios

Some lenders may stretch the 28/36 ratio to 50% of the borrower's gross monthly income. Although this may increase your borrowing ability, it could also mean that you'll be taking on more debt than you can afford. It's essential to weigh the pros and cons of using a higher debt-to-income ratio before committing to a mortgage. In some cases, a higher debt-to-income ratio may be suitable, especially if you have a stable income and a low amount of non-housing debt. However, you should always be cautious about stretching your debt-to-income ratio too far.

Section 3: Consider Future Financial Changes

It's important to remember that your financial situation may change in the future. Your income may rise or fall, or you may have unexpected expenses arise, such as medical bills or a job loss. These changes can affect your housing affordability and your ability to make mortgage payments. To avoid getting in over your head, it's crucial to take a future-focused approach when buying a house. Consider your future income streams and adjust your housing budget accordingly. It's better to be conservative and have extra money saved up for emergencies than to overextend yourself and struggle to make ends meet.

Conclusion:

As a veteran or military homebuyer, buying a house is an essential investment decision that requires careful consideration of both your borrowing ability and affordability. Understanding the 28/36 ratio, stretch ratios, and possible future financial changes can help you make an informed decision when buying a house. Remember to use caution when deciding on housing affordability, especially when considering a higher debt-to-income ratio. It's essential to find the right balance between borrowing ability and affordability to make a sound investment decision that sets you up for financial success.