Tips for Buyers & Sellers: How Much Home Can You Afford 
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How Much Home Can You Afford?

The single most important part of buying a house is figuring out how much you can realistically afford to pay. You'll have to take a good look at your budget, debts, credit reports, and credit score. Once you have a good picture of your financial status, start saving as much money as you can for a down payment, closing costs and other extra expenses that come along with buying a house. Extra expenses could include paying for a home inspection (around $300 - $500 depending on where you live) or hiring a moving company after the sale is final.

Depending on the condition of your finances -- if you have a lot of debt, errors on your credit report, or a low credit score -- getting ready financially could take six to 12 months or more! If your credit score falls below 620, lenders may see you as a risky borrower. This might mean you can only qualify for a sub prime mortgage (one with a higher interest rate). It might be worth your time to take a year and work on building a better credit report before taking on the responsibility of a mortgage. Also, if you qualify for a lower interest rate you could save thousands of dollars over the life of the loan. Be wary of companies that offer to repair your credit for a fee.

Determining a Mortgage You Can Live With There are a few basic formulas commonly used by lenders to determine how much of a mortgage you can reasonably afford. These formulas are called qualifying ratios because they estimate the amount of money you should spend on mortgage payments in relation to your income and other expenses. It is important to remember that these ratios may vary from lender to lender and each application is handled on an individual basis, so the guidelines are just that - guidelines. Generally speaking, to qualify for conventional loans, housing expenses should not exceed 26 to 28 percent of your gross monthly income. Monthly housing costs include the mortgage principal, interest, taxes and insurance. For example, if your annual income is $30,000, your gross monthly income is $2,500, and $2,500 x 28 percent = $700. So you would probably qualify for a conventional home loan that requires monthly payments of $700. IT IS IMPORTANT THAT YOU SELECT A HOME THAT WILL MEET YOUR FAMILY'S NEEDS AND KEEP YOU HAPPY FOR YEARS TO COME. When budgeting to buy a home, it is important to allow enough money for additional expenses such as maintenance and utilities. If you are purchasing an existing home, gather utility cost averages and maintenance costs from previous owners or tenants to help you better prepare for homeownership. Generally speaking, if your finances are in decent shape, you could look for a home priced at two to three times your gross yearly salary. And while using mortgage calculators can give you a rough idea of how large of a mortgage you might qualify for, talking to a lender or mortgage broker in person will give you a more accurate figure. Avoid Financial Pitfalls When you buy a house, you enter into a long-term financial obligation. You fill out papers and sign legal documents based on those papers. It's important that you understand your responsibilities so that you won't be a victim, or a participant, in a fraud. When you apply for a mortgage loan, every piece of information you submit must be accurate and complete. Anything less is considered loan fraud. Unfortunately, there are people who may try to convince you to lie about your qualifications so that they can illegally make money at your expense. These people will appear to be your friends, saying that they're trying to help you. They may downplay or deny the importance of complying with the law and suggest that it's all just "red tape" that everyone ignores. Don't allow yourself to be fooled. Be Smart Before you sign anything, read and make sure you understand it. Refuse to sign any blank documents. Accurately report your income, your employment, your assets, & your debts. Don't buy property or borrow money for someone else. Disclosure of loan terms is not just a formality. It's the law and you have the right to know. Be Honest Don't change your income tax returns for any reason. Tell the whole truth about money gifts. Don't list fake co-borrowers on your loan application. Be truthful about your credit problems, past and present. Be honest about your intention to occupy the house. Don't provide false supporting documentation. Don't Be Discouraged If your loan application is rejected, find out what the problem is and how it can be resolved. Maybe you need to look for a less expensive house in Hampstead area, or save more money. Check to see if there are any affordable housing and community programs you might be eligible for to help you through your home buying process.