Real Estate Financing - How To Determine How Big of a

Home Mortgage You Can Afford

One of the first steps before you start looking for your dream home is to ask yourself what you can afford to spend on a monthly house payment.  Although you may come up with some  better or creative financing, the following tips will be based on a 20 percent typical down payment.

Collect a few of the local home guides you see stacked up at the local grocery stores and look at a few ads in the real estate section of your Sunday newspaper for houses you might consider buying.

Look at the sales prices and remember these are asking or listed prices, not actual sale or sold prices.  Multiply these prices by 0.80 to give yourself a ballpark figure on the mortgage debt amount of these homes. Remember this is assuming you are paying 20 percent down.

Calculate what the mortgage or loan payments for these houses would be. If you have access to personal finance software you can use it or an online mortgage calculator.

Then add what you would have to pay monthly toward property taxes, insurance and private mortgage insurance (PMI).  Although you may not have to pay private mortgage insurance with a 20 percent down payment.

Add this to your monthly costs for utilities.  If you're renting now, then ask friends or family who are homeowners what they typically pay per month or ask you real estate agent or broker for typical amounts.

Next add in your monthly budget for home maintenance.  You want to budget about one percent of the cost of the home for maintenance each year. For example if the house costs $200,000, budget $2000 annually or $166 per month.

Next add in your prorated monthly cost of any furnishings, landscaping and any nonessential improvements to the house.

Now compare this figure with your monthly NET income to estimate affordability.  Multiply your monthly income by 0.40 (40 percent is commonly used). If this figure is equal to or greater than your estimated monthly cost figures, then the house may be well within your price range.