Can you afford to buy a home?

A good real estate agent can help you make the critical decision of whether you can afford to buy a home. A realtor knows the housing market, the current interest rates and the requirements of various lenders, can suggest ways you can accrue down payments, and can explain alternative financing methods.

First, of course, you must decide whether or not you want to buy a house. Consider all the advantages and disadvantages to owning as opposed to renting. Consider your present life style, job situation, willingness to settle down. It is not to your financial advantage to buy a house and then to have to sell it because you have to move within only a couple of years.

Then decide whether you can afford to buy a house. If you do not have a sufficient amount of money for a down payment or if you are unable to qualify for a loan because of any one of a variety of reasons, then you may need to wait and accumulate some money for the down payment or wait until you become secure in your monthly income so that you can qualify for a loan and can comfortably afford your monthly payments. If you have a lot of debt, you may need to pay down your debt before you can qualify for a loan. If you need to buy a car or some other big purchase now and you already have a good bit of debt, your credit report may disqualify you for the loan. The point is that you must be sure how your mortgage payment, along with taxes, insurance, and any homeowner association dues or other costs connected with the mortgage payment, will fit into your budget today as well as fifteen or thirty years down the road.

A good rule of thumb is that your monthly housing expense, including mortgage and monthly payments on taxes and insurance should not exceed 28 percent of your gross monthly income, and your proposed monthly housing expense combined with your already existing debt load should not exceed 36 percent. A lender will look at your information to see if you fit into this formula before being willing to lend you money to purchase a house.

Gross monthly income includes not only salary but any regular and recurring income (such as stock dividends, alimony, lottery payoffs, etc.) that you can document. If you can’t document it, or it doesn’t show up on your tax return, you can’t use it to qualify for a loan.

Your level of monthly debt obligation includes every regular monthly payment, like credit cards, car loans, personal debts, child support, etc. (For credit cards, use the minimum monthly payment. If your debt will be paid off in less than six months, you don’t have to count it.)

Even if you can’t show the right balance between income and obligations, you may be able to have a little “wiggle room” with your lender if you have accumulated enough money to make a large cash down payment, larger than the usual 10% of the sales price, or if you’re willing to pay a higher interest rate on the loan balance.

So, with the help of a good real estate agent, you can do the math, determine how much down payment you want to make, with plenty set aside for those extra “closing costs” that go along with buying a house, and figure out how much you can reasonably afford to pay in total for monthly payments. Then your realtor will help you begin to look for the house of your dreams.

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