How Much House Can You Afford?

It’s an exciting yet complicated time in your life when you are able to buy your first home. With all of the negative talk about the housing industry and foreclosures, it’s pretty natural for you to worry about buying your first home. There are some things you need to remember about buying a house, even before you start looking for the perfect property. Most importantly, and especially since foreclosures are what you want to avoid, you need to know how much house you can afford to buy.

So how do you know?

There are three factors to consider when you are considering how much house you can buy. Here is a look at these factors and what you need to know:

Monthly Income Amounts
You need to know what your monthly income is before taxes from your job. It also can include child support, alimony, social security benefits, disability payments, and other regular income you receive. Mortgage lenders will be looking to see if a mortgage will exceed more than 28% of your gross income each month. This also includes your housing expenses in additional to your mortgage principal, such as interest payments, property taxes, and homeowner’s insurance. You will be able to estimate the cost of the house you can afford based on these first percentages. Once you know how much you make, you can get a general idea of what house you can afford.

Long-Term Debt Amounts
Mortgage lenders will also be looking at your other financial obligations, including loan payments, car loans, student loans, revolving accounts, and child support/alimony responsibilities. Long-term debts are generally categorized by those lasting for 10 months or more into the future. The total of your housing expenses in addition to the long-term debt totals, should not be more than 36% of your gross monthly income amount. If you have several open, long-term debts, consider paying down as much debt as you have before even starting the mortgage application process.

Total Down Payment Amount
When you are ready to get a mortgage, lenders will want to know how much cash you have to make a down payment. Most nowadays will expect at least 20% of the home price down and for you to fund all closing costs, which are usually 3-6% of the total loan amount. There are several ways for you to come up with a down payment, including straight cash, stocks, mutual funds, and even monetary gifts from relatives. There are also down payment assistance programs available to help with the down payment amount, some of which are grants that do not have to be paid back.

When you start thinking about getting a house, you need to start getting prepared. Make sure your credit report and score are as good as they can be and work to pay off as much debt as possible. Then start saving up for the down payment. Do not expect a mortgage to be granted overnight, unless you are independently wealthy. It will take some time to get the best rates and deals as possible. There should never be a rush to make such a big investment of your money or your time.