How much you can afford is a main concern, if not the biggest question you'll have, when you begin shopping for a new home. If you are looking to buy a home, these steps will help you determine just how much you can spend on a home.
It's most likely that you'll need to take out a mortgage to buy a home - few buyers purchase a home completely with cash. If you'll be taking out a mortgage, use an online mortgage calculator like the one at Trulia to estimate how much your mortgage payments will be by typing in values like the price of the property, what percentage of the price you plan to pay in a down payment (e.g., $40,000 for a 20 percent down payment on a $200,000 home), the dollar amount of your loan, its annual interest rate, and private mortgage insurance, if any.
Get pre-qualified for a mortgage loan, and if you can, get estimates from several lenders. The lender(s) will tell you how much you'll be able to finance through a loan and what your monthly payments will be. When you begin your home shopping in earnest, get pre-approved by a lender. When you are pre-approved by a lender, it means that the lender has agreed to lend you a specified amount under certain conditions (length of the loan, interest rate, etc.) This agreement gives you a definite idea of how much you are able to borrow.
Once your know how much your monthly mortgage payment will be, calculate your monthly housing costs, which will include your mortgage payments, property taxes and homeowner's insurance. Ideally, these costs shouldn't exceed 28 percent of your gross income. To pad your estimations to cover any unforeseen expenses, you may want to try not to exceed 28 percent of your take-home pay (which is lower than your gross income) -- instead of basing your calculations on your income before taxes. So, if your monthly income is $5,000 after taxes, you could aim to keep your total monthly housing costs at about $1,400 a month ($5,000 x .28=$1,400).
Take stock of your debt including car loans, student loans and credit cards -- and try to keep your total debt, or your debt to income ratio (including your mortgage debt) to no more than 36 percent of your gross income. (For more leeway, base your calculations on your net, or your after-tax pay.) So, with a take-home pay of $5,000, you may want to aim for a total debt of no more than $1,800 a month. ($5,000 x .36 =$1,800).
This includes how much you may have to spend per month to heat, cool and maintain your new home (including cleaning and lawn services if you plan to use those), plus monthly commuting, food and entertainment costs. The amount you spend on these items per month will leave you with less income to put toward mortgage payments.
Don't forget that you'll have to pay about 2 to 5 percent of your home's purchase price in closing costs (for a home inspection, lawyer's fees and discount loan points), so subtract this amount when calculating how much money you'll have for a down payment. (E.g., for a $100,000 home, you may have to pay $2,000 to $5,000 in closing costs.)
You'll want to have some savings on hand to pay for any decorating, furniture or fixes for your home. If you don't save extra cash for these items, you might find yourself sitting on the floor in your new house for quite some time. Ouch.
Saving for a down payment for a home is a big commitment -- and a tough one. You may be required to have as much as 20 percent down to purchase your own place -- if you were to buy a home for $200,000, that means you'll need to have at least $40,000 to purchase ...