These days, this is an easy question to answer. In fact, the banks will answer it for you. In the hangover following the crazy lending spree that led to the nation's credit crisis, the banks are sticking to strict standards when it comes to lending. So you don't have to worry about making the wrong decision about buying a second house. If you don't have the income, you won't get the loan.
According to Bankrate.com, the formula is fairly straightforward: For most borrowers, the banks will extend a monthly allowance for debt that does not exceed 36 percent of your gross household income. That means that your existing mortgage, your car loan and any alimony, student loans or ongoing credit card payments cannot exceed 36 percent of your income. So that second loan has to fit into that 36 percent.
Here's what the formula means in real money:
If you make $100,000 per year before taxes, then the banks will extend credit to cover up to a total of $3,000 per month in payments, including the payment on the second house.
If you make $50,000 per year, that total comes to $1,500 per month.
That may not sound like much, but you may not need that much money, either.
One of the outcomes of the credit crisis was that large percentages of homes in resort areas fell into foreclosure. When the banks weren't applying strict standards to borrowers, many people bought dream vacation homes that they really couldn't afford. In many resort areas, you can pick up small houses for $50,000 to $100,000. And a mortgage payment at the lower end of that spectrum could be as low as $270 per month.
If you need to borrow more money, bear in mind that loan officers can shift that debt-to-income ratio for borrowers with exceptional credit records and payment history. But these days, you'd better have those matters under control before you even touch a loan application. The best thing you can do is to establish a record of paying your bills on time. And whatever you do, keep those credit card balances down.
For more information on buying a home, check out the links below.
- Bankrate.com. "Mortgage Calculator." (March 22, 2011) http://www.bankrate.com/calculators/mortgages/mortgage-calculator.aspx
- Howard, Clark and Mark Meltzer. "Clark Smart Real Estate: The Ultimate Guide to Buying and Selling Real Estate." Hyperion. April 10, 2007.
- Karpinski, Christine. "Profit from Your Vacation Home Dream: The Complete Guide to a Savvy Financial and Emotional Investment." Kaplan Business. July 1, 2005.