Figuring out just how much home you can afford is an important aspect of buying a home. Think about this scenario: You find a home you absolutely love and begin the whole loan process only to be turned down because you simply cannot afford it. By figuring out how much house you can afford beforehand, you can avoid this disappointment and frustration. Not only do you avoid disappointment and frustration with the home buying experience, you can also avoid future financial troubles you might face if a lender does indeed lend you more money than you can afford.



The main factor you need to consider when looking at home affordability is your income. We all know the importance of income, but when it comes to borrowing, lenders want to know that you can pay your mortgage. At a time when sub-prime lending has created significant lending issues, your income is even more important and many lenders may become stricter about who they lend to because of the financial issues banks are now having to deal with because of sub-prime lending. A good rule of thumb when calculating the amount of home you can afford is to apply the 33% rule. Essentially, no more than a third of your income should go towards housing costs. This applies whether you rent or buy. It is especially important if you are buying a home. Using the 33% rule, you can calculate just how much home you can afford. You need to remember, that this is not only payment on the mortgage, but also on home insurance and property taxes. For instance, say that your income is $5000 a month. Using the 33% rule, you can afford to pay about $1,670 a month for your mortgage, home insurance and taxes.

While your income and the actual housing costs are important factors you must consider, there is also the home loan itself. There are aspects of the loan that will have a direct relationship to how much of a house you can afford. Essentially, your goal in finding a mortgage should be to get the best interest rate for the long term. The mortgage rate will depend on many factors, many of which you have some control over. One of these factors is the number of points you pay on the mortgage. Points are simply fees you pay to the lender at the closing of the home loan. Many lenders will only advertise one loan rate based on a certain number of points. However, you can ask if there are other options that will lower your interest rate on the mortgage. In general, the more points you pay at closing, the lower the interest rate. This may be a good option for those who have some cash after the down payment and would like to lower their overall mortgage payments in the future. Paying fewer points may be attractive to those who don't have a lot of cash left over after the down payment. Be sure to ask any potential lender about their points schedule.

To summarize, save yourself some disappointment and frustration down the road. Do a little bit of work in calculating how much home you can afford before shopping for a home. Be sure to consider your income, how much you have saved for a down payment, the amount of debt you have and the costs of insurance and taxes. By doing a little work, you will have a good idea as to how much home you may be able to afford.