How Much House Can I Afford? What Do I Do First?

American home ownership is at an all time high!  The American dream to own, live in,  and someday sell a home is becoming a reality for a record number of your fellow citizens on a daily basis.

With all this excitement, new building, and relatively low (by historic terms) interest rates, the question is frequently asked, "How much home can I afford?" and "What is my first step to home ownership?"

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Without being trite, you can afford all the home you can pay for, and if this purchase involves a lending institution, you might be surprised to know they have a very strong opinion about the matter.  To remove a little of the mystery, you can utilize a simple formula:

Divide your gross income by 12.  Now multiply your monthly income by .28.  

When a bank looks at your ability to repay your loan, this is generally the starting number that they will utilize to determine the safe amount you can pay for the big four:  principal, interest, taxes and insurance.  Depending on the amount of your other monthly debt commitments, you might find institutions willing to expand the baseline up to 32-36%.

If you are utilizing one of the national lending resource programs, FHA or VA, you will find the ratios may allow an expansion of up to 41% of your income.  So it may be possible to purchase, within the lender's guideline a home that will predetermine to take up to 41% of your gross income per month.

The next question should be, "But what can I really afford?".  Wise purchasing is all about making wise decisions as to the amount and term of a financial commitment.  It is possible to qualify for a loan, and afterward exist as a "house poor" family that can afford little else.  

A good rule of thumb is the .28% of your gross income.  Why?  It leaves you with a net earnings resource that will allow you to save for your future needs, and live without a constant financial pressure to meet current calls on cash.  Remember:  Your life is about more than where you live!  Many years ago we found people attending our Christian Economics seminars confessing that they could not afford to furnish their homes or send their kids to college, because they purchased as much home in as nice of neighborhood as they could possibly afford.  The net result usually appeared as growing balances on their charge accounts and credit cards.

What is the first step to a home purchase?  It is not to phone a realtor. Want to improve your negotiating technique during the house hunt purchase process?  Before you shop for a home, go to your lender and get pre-qualified.  This will provide two great benefits:  You will not waste a lot of time looking beneath or above your actual affordable price range, and a seller that knows the buyer is already pre-qualified knows that the house sale can be closed many, many weeks sooner.  As a result, the seller is often therefore more willing to negotiate to a fairer closing price.  Most experienced sellers now realize that a sales contract that is made contingent on qualifying for a mortgage is not nearly as valuable as a contract offered by a pre-qualified candidate.  Of course you must remember:  The seller evidently has to sell, but you do not have to buy.  Slow it all down.  Get pre-qualified.  Go hunting.

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Next article:  Should you buy or rent?  You might be surprised.

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