Home Buying 101: A Step by Step Guide to Buying a Home.
Step 2: Find out how much you want to afford.
Most likely your mortgage will be your largest monthly bill. Making sure that it’s within your budget is critical. It’s important to note that the goal is to find out how much you want to afford, not how much you can afford. People are often approved for a larger mortgage than they expect and its easy to get sucked in to buying at the top of your price range. Don’t let this happen to you. Sit down, make a budget, and see what’s realistic. Think about things like:
What do I want my life to look like? You may have heard the term “house poor.” This term describes the scenario where someone has spent a large part of their monthly income on their mortgage and house maintenance and has no money left over for a night on the town or a weekend on the slopes. If you’re a house nut this might be OK for you. If not, you may want to consider buying something more affordable.
Think about your other bills, current and future. In the lending world they call this your “debt to income ratio.” In other words, how much of your monthly income will go toward paying off debt. It’s a good idea to keep this number around 30% – 40% and definitely no higher than 50%. If you know that you’ll be taking on additional debt in the near future it might be better to keep this number even lower.
Consider the worst case scenario. What if you or your spouse lose your job? What if one of you gets sick? What if you had to move on short notice? Obviously you can’t plan for every disaster that might strike, but it’s good to consider “If I hit a rough patch will I be able to continue to pay my mortgage?”