How to Calculate the Price You Can Afford for a Home

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How to Calculate the Price You Can Afford for a Home

You may be pre-approved for a certain mortgage amount, but be careful that you're not taking on too big of a burden. Avoid financial hardship by looking at your budget and determining how much home you can really afford.

Step 1: Determine your down payment amount
Determine how much money you have available to put toward your down payment and closing costs. Include money from savings as well as any profit you would make selling your current home.

Step 2: Make a list of all of your current debts
Take stock of your finances by making a list of all of your current debts and their monthly payment amounts. List credit cards, auto loans, student loans, and any other outstanding debts. Total up the full amount you will need to have per month to pay these debts.

Tip
Avoid any major purchases on credit in the months leading up to your home purchase. Don't take on any new debt, or you risk damaging your credit score and affecting your ability to get a loan.

Step 3: Find current mortgage interest rates
Find current mortgage interest rates by talking to a mortgage lender or searching on the web.

Step 4: Input information into an online home affordability calculator
Input the information you have found into an online home affordability calculator to find the maximum amount that a lender is likely to give you toward a new home purchase. It will also provide information on the maximum monthly payment you can afford.

Tip
Be sure that the calculator includes property tax payment, insurance, and home owner's association fees, also known as PITI, in your monthly payment.

Step 5: Decide whether that is a realistic total
Decide whether you can really afford that total monthly payment. Remember that the calculator only takes into account your fixed debt, not expenses such as vacations or frequently dining out.

Step 6: Set your price limit, and stand firm
Set your personal price limit and, even if you are told that you qualify for more, stand firm. Don't stretch your finances and you will soon find the perfect house at the perfect price.

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How to Calculate the Price You Can Afford for a Home
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