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A Calculator For How Much House You Can Afford

By Erik Folgate

Smart Money has a good calculator for figuring out how much money the bank will lend you based on some basic income information and factor in the down payment you can shell out to figure out how much house you can buy.

I liked the calculator, because it used a fairly conservative ratio for figuring out how much you can afford. The ratio was about 28% of your gross household income. When people ask for my opinion about this subject, i always use the 25% rule. If your gross household income is $4,000, then a conservative house payment is about $1,000 a month. Going a little over this isn’t going to kill you, but when you get in the 35 to 40% range, you’ll start falling into that “house poor” category.

Remember, times are changing in the lending industry due to the latest fall out. If you have less than perfect credit, you’ll need to follow some basic steps.

  • Save up at least a 3 to 5% down payment. It’s much harder to get 100% financing today.
  • Save up an emergency fund. Count on things going wrong in your new house. You need cash in the bank when you’re a homeowner.
  • Clean up your credit report. Mortgage companies will be more cautious with who they extend loans.
  • Pay off as much debt as possible before pre-qualification of the loan. The less debt payments that you carry, the more house you can afford and the more likely that you’ll get a conventional loan at a good rate.

Erik Folgate
Erik and his wife, Lindzee, live in Orlando, Florida with a baby boy on the way. Erik works as an account manager for a marketing company, and considers counseling friends, family and the readers of Money Crashers his personal ministry to others. Erik became passionate about personal finance and helping others make wise financial decisions after racking up over $20k in credit card and student loan debt within the first two years of college.

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