Now that's the 85 dollar question, isn't it? There are many wonderful resources that explain the information lenders need to pre-qualify and pre-approve you for a mortgage loan. Call me if you have any questions about this or need to be preapproved. Your mortgage lender reviews and verifies the information you give them and then they determine a payment amount that you qualify for. They will give you an idea of the loan amount and purchase price range you should be looking in.
This payment amount that you qualify for is your total payment amount. This amount includes your repayment of principle, your interest payment and your payments for real estate taxes, homeowners insurance and mortgage insurance as required. This is very important to understand since unless you have a specific property in mind, have already gotten the tax information from your Realtor and a quote from your insurance agent this can impact the amount of loan you qualify for. Huh???? Your lender already told you the payment you qualify for so why would the loan amount and consequently the purchase price change?? I'll let you in a little secret, unless the lender knows the exact tax and insurance payments we (gulp) guess. Please work closely with your Realtor so you are targeting neighborhoods where the combination of price and tax amounts will fit in with what you qualify for.
Now you know what you qualify for it's time to think about what you can afford. These are often two very different amounts. Your lender knows what your debts are but they may not know that you pay hundreds of dollars a year so your daughter can be a cheerleader or that you have an expensive gardening habit. Sit down and write out your monthly and yearly expenditures, build in regular savings as well as an emergency savings and add what your lender tells you that you qualify for in a housing payment amount. You might be shocked to find yourself left with a negative number when you subtract that number from your take home income. When you are figuring out what you can afford be honest with your self. Don't figure out what you can afford based on a raise or promotion you haven't gotten yet, don't discount your "fun" money and most importantly don't short your savings amount.
I will leave you with this, only you know what you can afford. Unless you think you can afford more than you qualify for. Don't be pressured by your lender, realtor, cousin, pastor or anyone to spend more than you can afford. Don't buy with your heart, buy with your head!
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