The best way to understand how much home you can afford is to speak with a lender that you know, like, and trust. If you do not have one, your realtor should be able to recommend several for you to speak with. Now let’s be clear there are two aspects to affordability in my view.
- Home Price – when you speak with the lender he or she can tell you the maximum purchase price that you can afford. You may not want to look for homes at the upper end of your price range. But let the lender tell you anyway. It is good to know that information in case you don’t like the housing inventory in the upper limit of the lower price range you set for your search. For example, if you are approved for $300,000 but only want to search up to $250,000 you know you can increase the upper limit of your search if you desire.
- Monthly Payment – I BELIEVE THIS TO BE THE MOST IMPORTANT OF THE TWO… And here is why. It’s all about your monthly payment. Who cares if you can afford a $300,000 home if you do not like the monthly payment? Always, ask your lender what the upper end of your price range looks like in a monthly payment so that you can determine whether it is in your comfort zone. No one wants to be house poor. So don’t be. When qualifying you the bank will not consider expenses such as internet/cable services, food, utilities, etc. So pay attention to your monthly budget when considering your monthly payment comfort zone.
To help you determine the above the lender will want to know your income, your debts, your credit scores, and cash on hand. This information will allow the lender to work up your financial profile and thereby determine how much money the bank will be willing to lend you. Overall, affordability is affected by the interest rate, the amount of your downpayment, and price of home.