Buying a Home: The Missing Manual

Chapter 2. How Much Home Can You Afford?

Now that you’ve decided to buy a home, your next step is to determine just how much home you can afford. Figuring out your price range can take a little time, but it’s important to know what you can afford. After all, you’ll be living in your house for years, and you want to sleep soundly in it, without worrying about how you’ll make your next mortgage payment.

To get a price range, you have to take a look at your finances: how much income you have each month versus how much you spend. Taking a good, hard look at your budget not only helps you save for a down payment, it tells you how much you can afford in mortgage and other home-related costs each month. Reviewing your budget has another benefit. It helps you see your finances through a lender’s eyes. You can see whether you look like a high-risk or a low-risk borrower and take steps to increase your chances of getting a mortgage when you’re ready to buy a home.

How Much Can You Invest in a Home?

Before you start shopping for a home, you need to get a realistic sense of what you can afford. There’s no point in putting your time, energy, and effort—not to mention your emotions—into looking at houses that would break your budget. Aside from the sizable down payment (Chapter 6) and closing costs (Chapter 9) that you pay up front, owning a home means recurring expenses—principal, interest, taxes, insurance, utilities, maintenance, homeowners’ association fees—and occasional emergency expenses. ...