Determining How Much You Should Borrow for a Home

If you are a first-time home buyer, you may be excited and yet overwhelmed by the enormity of the decisions facing you.  Not only do you have to choose the home you want to buy in the neighborhood you prefer, but you have to decide how much to borrow and what type of loan to take out.  Care should be taken to avoid being “house poor” or simply working to afford the home.  The decisions you make now can have a direct impact on your finances for as long as you own the home (and sometimes longer).

As you begin the home search, your first question might be “How much can I borrow?”  Before you even go to the bank, you should have an idea of how much money you can comfortably afford to pay each month.  From your income, deduct all of your monthly expenses, excluding any rent expenses you may currently have.  Remember to also include a few new categories that house buying necessitates—property tax, homeowner’s insurance, and maintenance and repairs.  What you are left with is the amount you can afford for a mortgage.  Use a calculator mortgage online to determine how large of a loan you can take out and still pay the monthly payment you have determined you can afford.

You may find when you actually begin the loan application process that the bank will allow you to borrow more than you may feel you can comfortably afford.  Although it may be tempting to find a house in the upper range of the mortgage you qualify for, try to avoid this temptation.  If there is anything the last few years have shown us, it is that no job is truly secure.  If you or your spouse suddenly lost your job, would you still be able to afford the same mortgage?  If the answer is no, buy a home at the price level you can afford.

While buying a home can be intimidating for first time home buyers, know that the decisions of what home to buy and how much to borrow ultimately rests with you.  Take out a mortgage that you can truly afford, and you will not risk being house poor or working solely to pay for the house.  This in turn can make homeownership a positive experience rather than a stressful one.