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Home Buying For Dummies, 4th Edition by Eric Tyson MBA, Ray Brown

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Chapter 3

What Can You Afford to Buy?

In This Chapter

Determining the costs and tax benefits of homeownership

Getting a grip on closing costs

Acquiring and investing the down payment

When you walk into an auto showroom, one of the first questions the salespeople ask (after you pry them off you) is, “What is your budget?” or, “How much can you afford to spend on a car?” Of course, they hope that a large number rolls off your tongue. If you’re like many car buyers, you may be likely to say something along the lines of, “I’m not really sure.”

Many car buyers today finance the purchase — so they allow a banker or other lender to determine how much car they can afford. Such determinations are based on a buyer’s income and other debt obligations.

But here’s where most people get confused. When a lender says that you qualify to borrow, say, $30,000 for a car purchase, this doesn’t mean that you can afford to spend that much on a car. What the lender is effectively saying to you is, “Based on what little I know about your situation and the fact that I can’t control your future behavior, this is the maximum amount that I think is a prudent risk for my organization to lend to you.”

The lending organization normally requires a certain down payment to protect itself against the possibility that you may default on the loan. Should you default on an auto loan, for example, the lender has to send the repo man out to take away and sell your car. This process takes time and money, and the lender ...

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