Step 2 - Setting a Budget
Now that you know what is on your credit report and know your credit score it is time to set a budget for a new home. Knowing how much of a home you can afford to buy is very important. You don't want to go looking for homes that you can't afford to buy.
Generally most people have an idea of what they can afford when it comes to getting a new home. There are basically two different ways people consider how much they can spend on a new home. Some people think in terms of the basic cash price, while others think of an approximate monthly payment. Both of these methods have some disadvantages.
If you think in terms of the basic cash price, you need to remember there is more to buying a home than the initial cost. Such things as insurance, property tax, and maintenance cost should be taken into consideration as well. A more expensive home means higher insurance premiums and property taxes, were as older and less expensive homes can lead to higher maintenance costs. These are just some of the expenses that you will and/or may incur once you purchase the home, so you need to take this into consideration also.
The best way for you to figure out how much of a home you can afford is set down with a pen and paper, write down your monthly net pay (not your gross pay). Then figure and subtract your monthly expenses from your monthly net pay to determine what you can reasonably afford to pay. Remember most mortgages are for a term of 20 - 30 years, so this should be a payment that can be afforded for a long period of time.
Feel free to use our Mortgage Loan Size Calculator to estimate a maximum monthly payment. Please keep in mind that this calculator does not take into consideration your other monthly expenses, so be sure to subtract them from your monthly net pay before entering that total into the calculator. Also keep in mind, if you are devoting more than 25% (max) of your monthly net income to a home mortgage, you are probably spending to much.
These limits, however, apply only if you don't have a lot of other debt. Most lenders don't want more than 36% - 40% of your total income to go toward mortgage and other debt payments. If your total debt would push you over that figure, most lenders will reduce the size of the mortgage for which you may qualify.
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