When deciding to buy a home, it's often a challenge to determine what you can afford but it can be done. It's just a matter of taking a close look at the cost of the home you want in conjunction with your personal finances. Let's look more closely at this dynamic.
How to Determine What You Can Afford
There are a couple of factors that can help you determine what you can afford when you buy a home. They are:
- How much you can borrow. In determining how much you can borrow when you buy a home, you're looking at the amount that you are allowed to finance from a lender.
- How much down payment you have. The down payment looks at how much money you can come up with on your own to start the process. This number needs to be in the thousands to help you secure a good interest rate.
The Home-Buying Worksheet
There are a number of worksheets available online that can help you determine what you can afford as you make the decision to buy a home. Let's look at the segments of these worksheets to help you determine how much home you can afford.
- How much will the bank lend you? Part one of these worksheets normally looks at how much you're likely to receive in financing with the following factors: gross monthly income, monthly debt payments, real estate tax/homeowners insurance, and mortgage insurance.
- Your ratios. This section looks at your maximum housing ratio allowed and maximum total obligation ratio allowed.
- Maximum monthly payment. This section checks out your loan term in years and interest rate.
- Factoring in your down payment. By looking at the estimated equity in your current home, selling costs, closing costs, and any savings you can spend, you can determine your down payment.
All of these factors combined can help you determine what you can afford. This is a great estimation tool to use when you're ready to buy a home, as it gives you a realistic determination of what you have to work with.
