How Much Can You Afford?

Right At Home Daily

Do you know how much house you can afford?

Deciding that you have to have a certain size house on a certain size lot and in a certain neighborhood is great. But if it means struggling to make ends meet, you should downsize your dreams sooner rather than later.

How much you can afford depends on interest rates, how much debt you're carrying and how much you have to put down on a home.

If interest rates are around 10 percent, you have no other debt and you have 20 percent in cash for a down payment, you can buy a home for about 2 to 2 1/2 times your gross annual income. If interest rates are at 8 percent, you can spend perhaps 3 to 3 1/2 times your income. If interest rates fall below that, the numbers get even better.

The easiest thing in the world to do is pay a visit to a local lender and get pre-qualified or pre-approved for your home loan. Or, you can click onto our mortgage calculator and get a sense of how much you can afford to spend.

Being pre-qualified means you tell your lender how much you earn, how much you owe and what you have in cash and assets. Being pre-approved means your lender has verified your information, pulled a credit report and committed to fund your loan should it appraise out in value.

Take It And Run
When it comes to deciding how much you can afford to spend:

1. Make sure you get pre-qualified or pre-approved for your loan before you start looking.

2. Build up an emergency fund that you can tap for small fix-up projects, closing costs, or a true emergency. Most financial experts advise you to put away enough to cover six months worth of expenses. So if you spend $2,000 per month on your expenses, you'll want to build up a cash cushion of approximately $12,000.

3. Honestly assess your needs versus wants when it comes to any decorating and remodeling projects. You don't want to be "house poor."

4. Don't spend retirement or college funds on a bigger home. Instead, focus on saving more of your annual income.

5. Low- or zero-down payment loans are great if you can't scrape together a down payment, but you'll end up with a smaller home and having to pay mortgage insurance.

6. If you buy a condo, co-op, or a home that requires you to join the homeowner's association, your monthly dues will directly reduce how much you can afford to spend on a home.

Have questions about your home repairs? Ask it in our forum.