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Can You Afford This House?

You've decided to purchase a house, and you've started compiling a list of features you absolutely must have. You've got images of a pool, an acre lot, five bedrooms and a finished basement dancing in your head- but can you afford them? Figuring out how much house you can afford before you start looking is the best way to save time and money. You won't find yourself driving around town to view houses way outside your budget, and you won't start making offers on houses you'll struggle to pay for because you 'fell in love' when you saw it.

In order to figure out how much house you can afford, use the same methods the banks use when deciding how much they will lend you. Banks consider your income, along with your other existing debt (such as student loans, car payments, and credit card payments).

You will need 25 to 28% of your monthly income available for housing costs like the mortgage, taxes, and homeowner's insurance. Banks are also looking for a debt-to-income ratio of roughly 36% maximum, preferably less. So if you have no other debt and you make $50,000 per year gross, you can afford to spend about $1,041 on housing costs per month. That's $50,000 divided by 12 months (which equals $4,166), and then 25% of that number.

Now, let's use the same example, but add debt. If you make $50,000 per year and you also have a $300 per month car payment, what is your debt-to-income ratio? Add the car payment to your potential housing costs and you get $1,341. When factored into your monthly income, your debt-to-income ratio is 32%, which is within most banks' maximum.

While these numbers show the most house you can afford, remember that you don't have to buy your maximum amount of house. Buying a house that is less than your maximum will give you wiggle room to be able to afford all the necessary maintenance and lawn care that come with home ownership. You'll also want to keep in mind the price of fixing up an older house, if that's something you're interested in. Repairs on older houses may range from inexpensive, cosmetic issues like new carpet, to expensive structural issues like new wiring systems.

Once you have your maximum number, you can begin looking for houses within that price range. You can also get preapproved by the bank for a loan totaling this amount, so you are sure that you won't go over your budget when it's time to make an offer on a house. Be sure to shop for loans with more than one bank so you can be sure to get the lowest interest rate available to you.