Buying a home is an adventure that some people wait their entire life to experience so it's no surprise that some people get carried away when they begin house hunting. They go out and find a mortgage lender to pre-approve them for a certain loan amount and then hit the road looking for the perfect new place to live. The trouble with that is that homebuyers often get approved for a mortgage loan without considering whether they can actually afford to buy a home.
In order to keep from purchasing a home that you cannot afford, you need to know three things:
- Initial Costs: How much money do you have saved up to cover a down payment? Five percent is a common minimum down payment for a lender to provide a mortgage loan. That's $5,000 for every $100,000 worth of home.
- Income: Most mortgage lenders say that individuals can afford a home that is up to 2.5 times their annual income IF they do not have excessive debt.
- Monthly Bill / Debt Total: How much money do you owe others? As long as you debt is less that 30% of your monthly income, you can likely afford to purchase a home. If your debt is higher than that, your ability to purchase a home you can afford diminishes significantly.
Grab a pencil and tally things up! If the numbers don't come out just right, don't be discouraged. Take a couple months to save up more money, cuts expenses, and pay off debts. After that, reassess your situation.
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