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How Much House Can You Afford?

Take time to read about a few things you should know before buying a house.

In this article, you will find:

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How Much House Can You Afford?

To buy a house, one of the first things you must do is determine just how much house you can afford. You need to know how large a loan, or mortgage, you'll be able to get.

Before you apply for a mortgage, you need to get your finances in order. To improve your chances of getting the mortgage you want, do the following things:

  • Reduce your debt. Pay off as much debt as you can before you even start shopping for a mortgage. That includes credit cards, car debts, and any other debts you might have.
  • Start getting some money together for a down payment. We discuss down payments in more detail later on. For now, we'll just say that the more you have for your down payment, the less you'll have to finance on your loan.
  • Patch up any glitches on your credit rating or get some credit established—fast!

How Much Do You Make?

To determine how big a mortgage you can probably get, the first thing to look at is how much money you make, before taxes. This amount is your gross income. The recommended guideline is that you should spend no more than 28 percent of your gross monthly income on your mortgage payment. (If you're not sure exactly what your monthly income is, gather up your last couple of pay stubs and figure it out. Or divide your gross annual income by 12 to get the figure.) The mortgage payment includes the principal, interest, real estate taxes, and homeowners insurance.

Pocket Change

Some financial advisors, and many mortgage lenders, will tell you that it's okay to spend more than 28 percent of your monthly income on your mortgage. Many recommend not going higher than 33 percent—some may even go a point or two higher. Remember, however, that many people have made themselves “house poor” by buying a more expensive home than they reasonably could afford.

The principal of a mortgage is the amount loaned. If you borrow $120,000, that amount is the principal, and you are obligated to repay a portion of the mortgage amount each month. You pay principal each month based on the unpaid balance of the mortgage. The interest is the fee the lender charges you to use his money. Real estate taxes are the taxes assessed by the municipality and/or school district within which you live. They're based on the value of your home. And homeowners insur-ance fees are the cost of insurance to protect the property and its contents. The four things are normally figured into each payment you'll make on your mortgage, although the taxes and insurance are sometimes paid separately.

Money Pit

Realtors sometimes will encourage you to buy a home that's more than you're comfortable handling financially. Their reasoning is that, while your mortgage payment will stay the same, your salary is likely to increase, so you're fine to buy a house with a bigger mortgage payment than you'd like. A high mortgage payment can put you into the category of “house poor,” which could force you to cut spending in other areas.

Your Expenses

It seems that every time you turn around, your expenses have increased. When you're thinking about applying for a mortgage, you must pay close attention to your ex-penses as they relate to your income.

Although the recommended maximum for your mortgage payment is 28 percent of your gross monthly income, the recommended maximum for your total monthly debt is 36 percent of your income. That means that all your expenses other than a mortgage, such as your car payment, credit card bills, student loans, child support payments, and other bills, should total no more than 8 percent of your gross income.

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