Deciding that you have to have a certain size house on a certain size lot
and in a certain neighborhood is great. But if it means struggling to make ends
meet, you should downsize your dreams sooner rather than later.
How much you can afford depends on interest rates, how much debt you're
carrying, and how much you have to put down on a home.
If interest rates are around 10 percent, you have no other debt, and you
have
20 percent in cash for a down payment, you can buy a home for about 2 to 2
1/2 times your gross annual income. If interest rates are at 8 percent, you
can spend perhaps 3 to 3 1/2 times your income. If interest rates fall below
that, the numbers get even better.
The easiest thing in the world to do is pay a visit to a local lender and
get
pre-qualified or pre-approved for your home loan. Or, you can click onto our
mortgage calculator and get a sense of how much you can afford to spend.
Being pre-qualified means you tell your lender how much you earn, how much
you owe, and what you have in cash and assets. Being pre-approved means your
lender has verified your information, pulled a credit report, and committed
to fund your loan should it appraise out in value.
When it comes to deciding how much you can afford to spend:
Make sure you get pre-qualified or pre-approved for your loan before you start looking.
Build up an emergency fund that you can tap for small fix-up projects, closing costs, or a true emergency. Most financial experts advise you to put away enough to cover six months worth of expenses. So if you spend $2,000 per month on your expenses, you'll want to build up a cash cushion of approximately $12,000.
Honestly assess your needs versus wants when it comes to any decorating and remodeling projects. You don't want to be "house poor."
Don't spend retirement or college funds on a bigger home. Instead, focus on saving more of your annual income.
Low- or zero-down payment loans are great if you can't scrape together a down payment, but you'll end up with a smaller home and having to pay mortgage insurance.
If you buy a condo, co-op, or a home that requires you to join the homeowner's association, your monthly dues will directly reduce how much you can afford to spend on a home.
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Do you know how much house you can afford?
Make sure you get pre-qualified or pre-approved for your loan before you start looking.
