The biggest question people ask is whether they can afford to buy a house and if so, how much. The answer depends on a number of factors such as income, debt, credit rating, and more. If you are thinking about buying a new house, the first thing we recommend is that you set a budget. With this, you will know how much you can afford versus what the lenders say you can afford.
Remember, when you meet with a lender, he or she is going to qualify you at the top of the range. Therefore, while you might be told you can afford a $300,000 house, the truth may be that according to your budget, a $200,000 home is the top. In addition to the cost of your mortgage, the budget will also capture both long-term and short-term expenditures. For instance, you will know how much you need to go through closing on the house, how much is needed for getting settled in, and then the amount needed monthly for all bills.
As you prepare your budget, make sure the down payment of the house is listed near the top. The more down payment that you can make the better interest rate and loan you will secure. Although you will find some programs designed to get you into a home for as little as 3% to 5%, it is suggest you try to come up with a 10% to 20% down payment instead. This alone will make the purchase of your home much easier to deal with.
As a part of your budget, you can use the 28/36 ratio used by most reputable lenders. With this formula, the assumption is that you could afford 36% of your gross monthly pay for debt with 28% being focused on the mortgage payment. Remember, as a part of this formula, you would consider not just the house payment but also other debt such as a car payment, insurance, credit card debt, medical bills, and so on.
Once the budget is set, it would then become your responsibility to stick by it. Keep in mind that to afford a home, you may need to start planning your budget several years out. Rather than being discouraged, use this time to plan and save. That way, when you approach the time to buy, you will not be settling for just any house but the home that you have always dreamed of owning.