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Determining How Much Home You Can Afford

When you’re thinking about purchasing a home, it’s a very exciting time with a lot of things happening all at once—you are searching with a real estate agent or on your own through local listings, touring homes to find out which one you might want, and putting in offers on the home of your dreams.

Sometimes in all the excitement of preparing to buy that home, though, people can forget to do one of the most important things: get pre-qualified and figure out exactly how much you can afford to pay for a home. The amount you pay for your home should go beyond just the amount you can get qualified to borrow, as there are several factors that influence whether or not you can actually pay for the home you purchase. Here are some tips to help you figure out exactly what home price range you should be looking for.

1: Calculating Your Borrowing Power

There are several factors that go into the calculation of how much money a lender will provide you to purchase a home, including:

  • Income
  • Credit history
  • Down payment
  • Employment history
  • Residence and mortgage history

Before you even start looking for a home, it is a good idea to figure out exactly how much the lender would be able to give you—this prevents you from looking at homes that are two or three times what you can afford, then being disappointed by the homes available in your price range when you have to go down in price. The good news is that virtually all lenders will “pre-qualify” you for a loan to give you an idea of where you are at.

2: Outline Your Budget

When a lender tells you how much they would be willing to lend for a mortgage, they are basing it on a general calculation that takes into account your gross monthly income, your total debt payments each month, and the estimated costs of owning your home. What it does not (and cannot) account for are your personal spending habits. If you know that you want to spend extra each month shopping for clothes or going to the movies, you need to take that into account by calculating your own personal budget and knowing how much you want to spend on a home. If you have a target payment amount (including principle, interest, taxes, and insurance), you can talk to your lender and have them help you figure out the price range of homes that will fit that budget.

3: Understand All the Costs of Buying a Home

Your mortgage payment will include several things, including the principle and interest payments for the home that you are purchasing, homeowners insurance, and property taxes—the latter two are often added to your monthly payments. If you’re not putting 20 percent down on the home, you will also have to get mortgage insurance, which will add to your monthly payments.

After all these expenses, you should also take note of other potential costs of owning a home that won’t be in your mortgage payment, but are also required every month, such as utility costs, home repairs, and homeowners association fees in some cases. By adding up all these anticipated costs (and being realistic) you can make sure you will be able to afford the home you get. You should also account for the costs of getting the loan, including mortgage application fees and closing costs. Talk to your lender to learn more about these costs.

Knowing the costs and making appropriate calculations can help you get a home you will love, and one that you can afford.

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