How to Determine How Much Home You Can Afford to Buy

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How to Determine How Much Home You Can Afford to Buy

House owner/real estate agent giving away the keys - house out of focus

Some home hunters have lofty dreams of buying a gorgeous estate home when all that they can truly afford is a tiny starter home. Others believe that they could not afford to buy any decent property in the area, but they are surprised to learn just how far their dollar can go. The reality is that your financial situation directly affects your home-buying budget, and these steps will help you to more accurately determine how much home you can afford to buy.

Update Your Budget
All personal financial decisions should be made with a careful review of your budget. You understandably need to determine the maximum mortgage payment that you can comfortably pay, and this should not detract from your ability to save regularly or to live a comfortable lifestyle that you are accustomed to. Adjust the budget to account for extra expenses, such as property taxes, home insurance, larger utilities expenses, repairs, lawn care and more.

Determine a Comfortable Down Payment Amount
In addition to analyzing a comfortable mortgage payment for your budget, analyze your available cash reserves. If you are making a first-time home purchase, you may be able to take money out of a retirement account without penalty. Otherwise, you need to look at savings and investment accounts as well as other cash sources. Avoid being cash-poor after the purchase by leaving yourself a healthy buffer. A good rule of thumb is to create a cash reserve of at least three months of your mortgage payment.

Use a Mortgage Calculator
There are multiple mortgage calculators that can help you to estimate affordability. They will take into account your income and expenses as well as your available cash. Remember that these calculators may not always consider all of your expenses, such as lifestyle expenses that make life enjoyable for you or childcare expenses. Therefore, you should use affordability calculators with a grain of salt. An alternative is to use a mortgage payment generator which takes into account a mortgage payment, a loan term, an interest rate and a down payment amount to generate a comfortable sales price.

Get Pre-Qualified for a New Home Loan
Even when you find a mortgage payment that is comfortable for you, you must still get approved for financing. Each loan program has unique lending requirements, including those related to your debt-to-income ratio, your credit rating, your cash reserve and more. Getting pre-qualified for a home loan through a lender or mortgage broker is a smart idea. Remember, however, that you may be prequalified for a larger mortgage payment than you can actually afford to pay. Focus on setting up an affordable mortgage payment rather than stressing your budget by taking on too much home.

Determining your price range before you start shopping can save you a considerable amount of time, energy and stress. Knowing your price range helps you to narrow down your focus so that you only look at homes that you can afford. Walk through these essential steps before you start searching for a new home.

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