As a first-time home buyer, your biggest risk is that you buy outside your budget, which means the important part of shopping for homes is knowing how much home you can afford.
So, how much home can you afford? Only you can answer that question, so start by asking yourself: How much do I want to pay for housing each month?
- Do you want to pay no more than your current rent?
- Do you want to pay a few hundred dollars more than your current rent?
- Do you want to pay less than your current rent?
Find your number, and write it down. This answers “how much house can I afford” because you’re not buying the whole home with cash. Instead, you’re getting a loan, and it’s the payments you have to live with.
Now that you’ve found your maximum housing payment, it’s time to work backwards to find the maximum purchase price to use for your home shopping.
Here’s how to do it:
Your monthly housing payment is more than just your mortgage – it has four parts to it.
- Principal: The money you pay back on your loan each month
- Interest: The money you pay in loan interest each month
- Real Estate Taxes: The money paid to your local government for owning a home
- Homeowners Insurance: The money paid to insure your home from catastrophe
There’s also a fifth part, Association Dues, if you buy a home in a condominium or neighborhood development. Dues are the money paid for common services such as landscaping and maintenance.
When you add up those parts, if it’s under your budget, the home is in range. The next step is to determine whether you can get approved for a mortgage for your budgeted payment amount.
To decide whether you’re approved, your mortgage lender will take your estimate mortgage payment, plus they monthly payments from your credit report, and compare it to your pre-tax income. So long as you’re not spending more than $43 of every $100 dollars you make on your mortgage and other payments, you’re likely to be approved.
Depending on your credit profile, it’s possible to be approved for a monthly spend up to $50 of every $100 you make.
