Now that’s the BIG question? But here’s the thing, it’s NOT what the bank or lending institution says you can afford. The lending institution will give you a guideline as to what you can afford based on what you earn, how much you owe and other factors. However, you need to do a careful examination of your own finances, your budget and your expenses. This article will guide you through that process.

Start with determining your Budget

This is very important. Its one thing to go to a lender to find out how much you can afford. In fact, what they really tell you is how much you can borrow. How much you can afford depends on determining your budget and the size of the Monthly payment you can afford.

Then look at your income vs. expenses

Subtract your Monthly expenses from your Monthly net income (that’s after all deductions, taxes, etc.) and that will give you a general idea of what you can afford to put towards a Mortgage each Month. Here are some of the things that should be on your list of Monthly expenses:

* Monthly grocery and other shopping expenses
* Credit card and other loan expenses
* Car loan and insurance payments (even if you do not pay these Monthly, calculate the Monthly cost)
* Any ongoing out-of-pocket health care costs you may have
* Entertainment expenses (movies, dining out, parties, etc.)
* Monthly savings and retirement payments

Of course, if you are also paying rent, you can omit that from your list of expenses as this will disappear when you buy a house.

Once you subtract your expenses from your income you will have a working figure that you will be able to put towards a mortgage.

Start the ‘numbers’ game

Once you have arrived at your “number” start plugging it into some basic mortgage calculators. There are calculators on this website that you can use. You can start by working backwards from the price of a house you may be interested in. Or you can start with the Monthly amount you can afford to see what kind of house you can get. These calculators will only give you a general idea though. You still have to sit down with a lending institution.

Be careful not to become ‘house poor’

It is important to be honest with yourself when doing this exercise. If you are unsure of what you spend each Month or unsure of the cost of your expenses, do an audit of your spend for 1 to 3 Months. Record each transaction during this time period. Then after you arrive at the amount of money you can put towards a Mortgage, be careful NOT to exceed this amount. Otherwise you may find yourself in a position where:

1) You have to get a second job or find other means to supplement your income to make your mortgage payments, or

2) You gradually fall behind on your mortgage payments and wind up in a position where you could face foreclosure

I hope you found this information useful. Good luck to you and happy househunting!

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