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How Much House Can You Afford?

By Erik Folgate

It’s getting to be that time where more people are looking to buy a house and more people are looking to sell their house. My wife and I were looking at houses this weekend, and the question of “how much house can we afford” came up in a conversation.

First, you need to realize that mortgage lenders are NOT the ones to ask this question. Some of them are good and honest people, but A LOT of them are just looking to make a commission, and they know every trick in the book to make it LOOK like you can afford a certain mortgage. Mortgage lenders love to play with the interest only loans, adjustable rate mortgages, and throw in origination fees and pre-paid interest (they call it points). A mortgage lender may say that you can afford $1000 payment, but you need to figure this out on your own by sitting down and looking at your own budget.

Things to Consider When Buying a House

  • Consider how much you currently pay for your current rent or mortgage payment. How much higher could you go and not be stretching to the point that you can’t put food on the table.
  • If you’re a first-time home buyer, you must factor in property taxes, homeowner’s insurance, and routine maintenance that goes along with having a mortgage payment. Also, if you don’t put at least 20% as a down payment, most mortgage companies will make you pay private mortgage insurance. This is an insurance that covers their butt if you default on your loan. The way to get around PMI is by getting a second mortgage, but the second mortgage always has a higher interest rate, so you may be better off paying the PMI until you get 20% equity in the home.
  • Consider the rule of thumb that your mortgage payment should not exceed 25 – 30% of your take home pay. If you have a $4,000 take-home household income, then you can easily afford a $1,000 mortgage payment. Anything more than $1,000, you’ll be pushing it to the limit and you don’t want to get into that dangerous zone.
  • ALWAYS make sure that you have a good emergency fund if you want to own a home. Owning a home is a big deal. You MUST have some cash on hand for large maintenance projects. (i.e. the A/C craps out on you).

Remember, there is no rush into buying a house for the first time, or upgrading to a bigger house. Find the house that suits you best both physically and financially. People that rush into decisions about buying a house are the ones that find themselves struggling to make house payments and having more problems than the house is worth.

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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  • http://www.1siliconvalley.com/ Steve Leung

    Agreed, the American Dream isn’t about buying a house just to have it, it’s about the lifestyle improvement you’re supposed to see. If you’re in debt out of your eyeballs because of too big of a mortgage, that’s just not going to happen! I have a few articles posted on my web site that relate to this, but I think the most important one is “When Not to Buy a House”

    http://www.1siliconvalley.com/when-not-to-buy-a-house/

  • http://madsaver.com Mac

    Well said…do not rush into buying a home. I did that with my current home (7 years ago) and have regretted it since the first month in. And of course I waited to late to put it on the market, so we’re not getting a lot of interest in this buyer’s market. Don’t even want to think about how much money I will lose on this place…just hope I’m able to pay off the mortgage after closing! :(

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