When you start looking for a new home, ask yourself, “How much should I borrow?” not, “How much could I borrow?”. Instead of focusing on the most expensive home you can buy, look for a home that fits your budget as well as your family.
Determine a Budget
First you need to work out a monthly household budget. Once you have your budget in place, you can see how much room you have to add a new loan and more home owner expenses. After all, you do not want to be stretched to the limit when settling in to a new house.
I recommend using Bank of America’s Affordability Calculator to figure out your pre-tax income, your current debt payments (credit cards, car loans), your savings and how the additional loan payment will impact your finances.
There are a lot of new costs associated with owning a home such as home owners insurance, private mortgage insurance (if you don’t put 20% down), repairs and possibly higher utilities.
Apply for a Mortgage
Once you have created a budget and found out exactly how much of a monthly payment you can afford it’s time to talk with a lender and find out how big of a loan that will get you.
When shopping around (which you should do) and finding the best rates, make sure that you understand the terms and feel comfortable with the monthly payments over the entirety of the loan(typically 30 years).
If a lender says you can afford more than yor budget, consider if this higher number would be a stretch. The lender is primarily looking at your debt payments, they are not looking at child care expenses or other expenses you may have that don’t report to credit agencies. You do not have to borrow the max available and if the lender keeps trying to push you into it, find a new lender.
You can also consider getting a pre-qualification. A pre-qualification letter says that the lender has looked at your finances and believes you are worthy of a loan at that amount. A lot of real estate agents require you to have a pre-qualification letter before they will show you houses. This letter is not a guarantee from the lender but it is a good first step.
Lastly, when considering how much you can borrow, don’t forget about being able to save for retirement. You need to continually focus on building a stronger future and your ability to invest outside of your own home is a big part of that.
