HOW MUCH HOUSE CAN I AFFORD?

While there's no single number that fits every home shopper, your finances should be in good shape if you want to purchase a home. Ideally you should be:
  • debt-free
  • have three to six months' worth of paychecks saved
  • also have enough saved up to cover your down payment

Your Best Bet: Get Preapproved

Preapproval requires you to contact a lender or mortgage broker and have them formally evaluate your finances (which can be done online as well as in person). To do this, you will fill out an application form complete with bank account statements, recent pay stub, tax forms, and a credit report that the lender will analyze to determine your mortgage options.
When you get preapproved, the lender is committing, in writing, to funding the agreed-upon loan, assuming there are no paperwork issues

How it Differs from Prequalification

Prequalification will also allow you to find out what size mortgage you can afford, but is more of an informal estimate without commitment from the lender.
To get prequalified, you will inform the lender how much you earn and what debts you have. Using these numbers and a pre-existing formula, the lender will provide you with a mortgage amount you can theoretically support.
Opting for prequalification over preapproval can be beneficial if you want to wait to shop around for the best mortgage deal, you don't want to pay application fee yet, and you don't want to be tied down to a specific lender.

Movoto's Buyer Tip:

Beware of lenders who try to sign you up for loans that are larger than you can afford. A lender who prequalifies you might say that you're able to afford a $300,000 home, but the decision still rests on your shoulders (despite the lender's efforts to persuade you). You don't want to overextend your budget, so be sure to calculate all costs associated with buying the pricier home to ensure you can afford it.

Mortgages, Then and Now

Before the "mortgage meltdown" of 2007 and 2008, it was typical for home buyers to just go to a mortgage lender for an answer. But it turns out that many lenders were somewhat deceptively convincing borrowers to obtain larger loans than they could afford to pay back.
Much of the mess was caused by "teaser" loans, or adjustable-rate mortgages (ARMs) that offer low initial interest rates. ARMs drop mortgage payments from their true market rate to a much lower rate for a limited period of time. Eventually the mortgage payment is readjusted and many borrowers default on the loan because they can't afford the higher amount.
The tactics of pre-meltdown lenders should not make you afraid of getting a loan, but they should prompt you to research and scrutinize whatever type of mortgage you decide to go with. 
Consider asking your lender these questions:
  • Will my monthly payments remain constant for the life of the mortgage?
  • Can my monthly payment change at any point during the course of the loan?
  • If adjustable, when will the adjustment occur?
  • What would my new payment be, based on current interest rates?

Additional Fees

Don't forget that with the purchase of a home also comes regular homeowner and maintenance costs you need to be able to cover.
Some of the expenses you should expect to have include:
  • Mortgage payments
  • Property taxes
  • Homeowner's insurance policy premium
  • Utilities
  • Repairs and maintenance
Our website offers affordability and monthly payment calculators under the Buyer Tips section to help you figure out these costs and provide a working number for what you can afford.
Ultimately, the answer to "how much house can I afford?" is up to you (and how much your bank lender is willing to give).
It's worth taking a hard look at your budget for a better idea though, because you have to be able to live off of whatever's left from your paycheck after monthly mortgage payments, property taxes, and all the other costs going toward your new home.

Check Your Savings and Your Spending

One of the best methods for helping understand your budget is to keep track of your spending.
  • Make a list of all your monthly expenses--from groceries to gas to credit card payments
  • Average the past three months for an estimate
  • Include your monthly income, and subtract the total from that income
Then re-do the same list based on what your expected averages would be after buying a home. In addition to adding estimates for mortgage and property taxes, expenses like your utility bills should also change. This will help you gauge your monthly budget, which you should factor into your price range.
You might be surprised to learn that most people don't know how much they've saved or how much they should be saving. Look into your savings (and what you're prepared to put toward your house) to figure out how much you've saved for your future house.The best way to find out how much you need to save is by talking with a lender.

Movoto's Buyer Tip:

If you put money into a retirement account, that money typically requires a penalty to access. It's better for you to put money for a house into an Individual Retirement Account (IRA) or Roth IRA, because you can withdraw up to $10,000 (lifetime maximum) to put toward a new home. With a five-year-old Roth IRA, that withdrawal is also free from income tax.
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