guide to buying

Why Should I Buy?    How Much Can I Afford?    PreApprovals    Types Of Loans   
Shopping For A Home    Finding A Realtor    Negotiating    Closing The Deal

How much can you afford?

Here are the major components of home affordability:

Monthly mortgage payment.
Down payment.
Closing costs.
Relocation costs.
Monthly mortgage payment

Since your monthly payments will consist of mortgage principal and interest, property taxes and homeowner's insurance (collectively known as PITI), you need to see if you have the means to cover all of these with your regular monthly income. If you're a condominium or cooperative owner, add monthly maintenance fees.

Before hunting for a home, the first step is to determine how much of a house you can afford. You must first qualify with a bank or other mortgage lender. You should apply the following two tests to yourself before you see a lender:

Assuming a 10 percent down payment on your home, lenders will approve a loan only if your PITI (add maintenance costs, if you're buying a condominium or cooperative)—is 28 percent or less of your gross monthly income. Lenders often call this the housing ratio.

Your total debt payments including those for credit cards, auto and student loans and other revolving credit should not exceed 36 percent of your monthly gross income. Lenders often call this the debt ratio.

Using these 28 percent and 36 percent guidelines, complete the following Monthly Mortgage Worksheet to determine the size of the monthly mortgage payment you can afford:

Click to continue.