First Time Home Buyers Guide: How much house can I afford?

Lydia Taylor July 16th, 2007

The results are in: you have just talked to your mortgage loan officer and he has told you that you are qualified for anything under $200,000! Wow, that’s great isn’t it?

Not so fast.

The loan officer did the easy part- he calculated what he can loan you based on your credit history and income. But, he doesn’t pay all your bills every month, does he? Yeah, we wish! Just because he thinks you are qualified to pay a $200,000 mortgage does not mean that you can handle monthly payments on that mortgage, maintain the home, pay your other bills, AND eat! Before you get your heart set on that house, you need to really break down your finances.

Determine how much income you have each month. Subtract your regular bills (phone, car payments, television, groceries, taxes, etc.) Figure out if you want to save any of the leftover income for discretionary spending. For example, entertainment, remodeling, general shopping (clothes etc.)… Determine how many dollars per month remains, and then save at least 10% of that final amount for what ifs, such as if you are sick, the car breaks down, the oak tree falls on the house, etc. I call this the ‘junk happens’ fund. Basically, be smart and hold some money back for a rainy day.

Not a lot left is there? But this amount is what you could potentially spend per month on your mortgage. Keep in mind that your basic payment might not include PMI (Private Mortgage Insurance) or homeowners insurance, so that monthly payment could go up a little. It really is about what you can actually afford, not just what you have been told you can afford.

One last comment about that monthly budget. Keep in mind that what is at the top of your comfort level or just slightly over today might be VERY easy to pay in a few years. For example, after a couple of years you might pay off a car, freeing up money, or maybe you are due to get a promised raise during the year, allowing you the ability to more easily handle your mortgage payment. You can and should take the future into account too, not just the present. But beware that you do not rely on this thinking and get yourself in over you head! What if you find out your pregnant with twins next year?

So don’t count on buying at the ceiling of your pre-approval amount. Be a smart home buyer and keep that payment in your comfort zone.

If you are unsure about monthly payments and how they correlate to house values, the best thing to do is ask your mortgage broker. If you want to try a different tack for now, my website does provide a mortgage calculator to help you get a better idea of where your payment might be.

Good luck first timers- here’s to smart home buying. Exciting isn’t it!