Knowing What You Can Afford

By: Benjamin DeBell

If you want to purchase a property, one decision you will have to make up front is how much you can spend on real estate. While lenders may promise that you can have your dream home, you need to budget carefully so that you do not end up living paycheck to paycheck - or worse. When deciding how much you can afford, consider:

1) How much you can afford as a down payment. Consider any savings you have as well as loans you can get and assets you can sell. Traditionally, you should put down 20% of the asking price of your home. Therefore, if you can afford to put down $25 000 in a down payment, you can look at homes up to $250 000.

2) Your ideal homes. Look at the asking price of homes you are interested in buying and multiply that price by 0.80. This will give you a general idea of the mortgage debt for these homes.

3) Determining the monthly costs for the homes that interest you. Use an online mortgage calculator to guesstimate your monthly mortgage payments, and be sure to add property taxes, insurance costs, and private mortgage insurance (PMI) payments to this figure. Next, determine utility costs and add these to your total monthly cost. Add maintenance costs - these are usually estimated at 1% of the home's cost per year. Take a look at this monthly number. Take a look at your income. Can you afford that cost at your current income?

4) Comparing your monthly income with total monthly costs. Take a look at the total monthly costs of your ideal home and your monthly income. Multiply your monthly income by 0.40. If the number you get is larger than your estimated monthly cost for your ideal home, most real estate experts agree that you can afford that home.

5) Consider your total monthly costs right now. Do you have a lot of debts to repay? How much do these take up every month? If you paid down these debts, would the difference allow you to make payments on your home? Are your monthly rental costs about the same or just slightly smaller than what you might expect to pay per month for a home?

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