The Real Estate Encyclopedia
How Do I Determine What I Can Afford?
Category - Home Buying Questions - Search & Offer FAQ's

Buying a home is one of the biggest financial and lifestyle decisions you will make, so it pays to make an informed decision by first looking at the main advantages and disadvantages of homeownership.


The first step, in deciding whether you are ready for home ownership and what you can afford is to look at your savings and determine whether you will be able to make a 10%, preferably a 20%, down payment. To the down payment amount, you must add the closing costs involved in completing the purchase transaction.  Your lender is required by law to disclose all the details regarding the loan prior to closing.  Visit FINANCING, for more information. 


Most lenders base their home loan qualification on both your total monthly gross income and your monthly expenses. These monthly expenses include property taxes, PMI, association dues, insurance, and credit card payments.


Depending on your credit rating, lenders will typically use the following calculation methods for figuring out the highest payment you could qualify for:


Medium Credit - The lesser of 28 % of gross income or 36 % of gross income less fixed monthly expenses.


Good Credit - The lesser of 36 % of gross income or 42 % of gross income less fixed monthly expenses.


To summarize, what the preceding methods tell you is that a lender will be more likely to approve you at a lower interest rate for a higher loan amount, based on an excellent credit history.


After you have calculated the maximum home price you can afford and before you commit to any type of a loan, you will need to calculate the up-front costs and expenses associated with buying a home to make sure you are financially prepared.  The real financial responsibilities of home ownership begin when you take possession of your new home; you will need to budget for mortgage payments, ongoing operating costs (utilities, services such as waste disposal, homeowner association fees, etc.), and an emergency fund.


It would be worth your time and money to consult a good financial advisor, who can provide you with an overall picture of your financial capabilities, and help you plan toward the purchase of a home. 

Once you've narrowed down your price range, online tools like Hubdin  will help you sort homes within your price range. The site also offers a mortgage calculator that will calculate your payments based on the home's listed price.

Home Buying Questions - Search & Offer FAQ's
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