How Much House Can I Afford?

If you are ready to buy your first home, congratulations! Investing in your primary residence can be one of the smartest decisions you will ever make. However, buying a home can seem like one of the most difficult and daunting tasks of your lifetime. Especially when it comes to deciding how much house you can afford. No worries, though: buying your first home can be an excellent (but still nerve-wracking!) experience once you decide on a price point. Let's look at the best ways to accomplish this.

Figuring Out the Basics

The biggest basic to determining your price point is understanding the mortgage world a little. Banks and credit unions want you to have enough money to live. They know that if you stretch yourself too thin you are more likely to miss payments. And banks don't want this to happen.

So, Freddie Mac and Fannie Mae (the banks) decided on some general guidelines for how much money they will lend you: about 30% max of your total take home pay. This 30% must include your first and second mortgage payments, taxes, and insurance.

With this in mind, if you add up the take home pay on your paycheck(s) and multiply by 30%, you will find your maximum housing payment goal. For example, a married couple making $5,000 per month could afford a $1,500 total housing payment, including taxes and insurance.

This is where the calculations can get a little tricky. Those pesky taxes and insurance vary by state, county, city, and insurance broker. You may have to do some checking around to figure out the exact amount you will pay in taxes and insurance each month or you can get preapproved for a mortgage (the lender can tell you exactly how much you can afford).

Using a Mortgage Calculator

Mortgage calculators are great tools for determining payment amounts on different house values. You can use the calculator at http://www.bankrate.com/calculators/mortgages/mortgage-calculator.aspx to calculate your mortgage payments.

By just plugging in a few numbers, you can determine a ballpark figure of your affordable home purchase price. If we plug in the numbers for our example, we find a couple taking home $5,000 in pay per month can afford roughly $240,000 worth of house.

Can I Really Afford That?

Knowing we can spend $240,000 on a house does not mean we should. You should take into account your current lifestyle, your needs in your new home, and your down payment ability.

If in your lifestyle, for example, you enjoy eating out or entertaining a lot, you will have to decide if a $240,000 house is worth cutting back on restaurant dinners or entertaining. If you need to furnish the entire house, a $240,000 house may not be the best value for you.

As for the down payment, if you have not saved enough for at least 10% down, you may need to drop the price point as well. 20% cash down is ideal, but in some cases your lender may allow an 80-10-10 loan (80% first mortgage, 10% second mortgage and 10% down payment).

So many factors go into deciding the home value you can afford that it is difficult sometimes to decide. If you run into any trouble fathoming how you can afford such a large monthly payment, don't worry. Everybody wonders in their first home purchase if they can make it happen. However, if you make a budget that includes your new mortgage payment, you can determine if there are some places where you can cut back.

If you still cannot decide on your own, seek the help of a mortgage professional. They can help you figure out how much the bank will lend to you, while taking all of your debts into consideration. They will not take into account your spending habits outside of your debts, though, so be sure to consider your lifestyle before committing to a mortgage repayment amount.

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