Calculating Your Personal Profits and Losses

Page 4

How Much House Payment Can You Afford?
As I've said, I'm no financial expert, but here's one thing I do know: Many lenders are happy to give you enough financial rope to hang yourself, especially for a mortgage. If you default on the loan, they'll just take the house back, keep the money you paid, and start fresh with a new borrower. It's up to you to stay within your means and only borrow what you know you can afford, which might not be the entire amount they're willing to give you.

"But my lender seems so knowledgeable," you might say. "He showed me a formula based on my income that proves I can afford the house I want." Some lenders use the 28/36 qualifying ratio to calculate how much to lend you. The numbers are percentages of your gross income: either 28% or 36% of what you earn before taxes or any other deductions. Lenders following this ratio will allow you to commit a maximum of 28% of your gross income for housing expenses or a maximum of 36% of that gross for housing expenses plus your other recurring debt. However, there is variation among lenders in what constitutes housing expenses and recurring debt and also in how strictly this ratio is applied. Furthermore, some lenders use a different calculation altogether. And, just to make it more confusing, a budget counselor is likely to give you a very different opinion: Many will suggest that you calculate what you can afford based on your net – not your gross – income and their allowable percentages will be more conservative.

The critical fact to keep in mind when deciding how much to borrow is this: Just because a lender will give it to you doesn't mean it's a good idea. You – not the lender – are the only one who can decide what's in your best interests.

Using Your Data to Organize a Budget
By now, all of this microscopic examination of your financial data might have inspired you to create a budget. We're getting very close to the point where I, the professional organizer, wish you well and hand you over to your financial advisor. But, in the spirit of organizing your data without judging it, I can offer you one more chart before you go.

When you create and follow a budget, you apply organizing skills where there once were none. Budgeting is a form of project management, which is a form of organizing, meaning it's just another process improvement to be made and has no reflection on your character or your worth as a person.