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Before you start shopping for a home, it’s a good idea to determine the amount you will be able to afford. In these tough economic times the last thing you want to do is find yourself in a situation where you’re overextended. In this article we’ll share a few guidelines you can follow to get a good idea of how much you will be able to qualify for.  Once you have an idea of the amount of mortgage you can qualify for you’ll be able to identify the price range of homes to look at and the fun of shopping can begin.

Your Mortgage should be No More than 28% of Your PreTax Income
In order to keep your housing costs affordable, determine what your total income is. You can include all income from jobs, rental income and any seasonal or part-time income you make. Once you know your income, 28% of that is how much you can reasonably afford to spend on housing. However, that 28% needs to cover more than just the mortgage. You need to factor in other housing expenses like property taxes and insurance as well. If you’re thinking about purchasing a condo, you also need to factor in homeowners association fees.

Total Debt Must be Less than 36% of Income
This is where most folks have trouble getting qualified for the home they really want. It isn’t enough to keep housing costs under 28%, you also have to keep total debt under 36%. The first step is to determine what 36% of your income is. Next, add up all of your debt payments – car loans or leases, credit cards or student loans.  Then subtract that total debt payment from the 36% of your income and what is remaining is the amount you can spend on housing payments.

How Much Down Payment do you have?
When you determine the amount of a mortgage, it is only the amount you will be borrowing.  For example, if you have $40,000 to put down on a home then you can subtract that from the amount you will be borrowing. So a $250,000 home in this example will need a $210,000 mortgage. Larger down payments will also help you qualify for lower interest rates which will lower your total monthly housing expenses and allow you to purchase a more expensive home.

Keep Some Emergency Cash
It is tempting when you’re buying a new home to sink all available cash into the purchase. If you can, resist the temptation. Consider what kind of position you would be in if you were to lose your job, or if you have two incomes, if one of you were to lose their job. You want to try to move in with 2-3 months of living expenses in a rainy day account.

Buying a home is an exciting event. Now that you understand the amount that you can spend on housing you can start shopping with confidence for homes that are within your price range.

A home is likely the biggest purchase you will ever make. When you shop for a mortgage it is crucial that you take a few simple steps to avoid making huge mistakes that can cost you thousands of dollars. Here we present 5 of the biggest mistakes that can be made and how to avoid them.

Mistake # 1 – Not Checking Your Credit Report
Credit reports frequently have errors. Those errors can bring your credit score down and will result in you qualifying for a mortgage at higher interest rates. It may not seem like it would make a big difference, but a 1% increase from 4% to 5% on a 250,000 mortgage can increase the total interest you’ll pay by over $50,000!

Mistake #2 – Not Comparing Rates and Fees
Just because your local bank claims to have great rates and fees doesn’t mean that they really do. If you were to buy a car you’d likely visit a few dealerships before making a decision. You need to do the same thing, only more so, with a mortgage loan. Check with a few local banks and credit unions and keep track of what they charge for interest rates and fees. Then compare those quotes to what you can find being offered online. Be sure to factor in all the fees when doing comparisons. Sometimes a lender will offer a low interest rate but the closing costs are substantially more. When you compare, be sure it’s apples to apples. A little research now can add up to big savings later.

Mistake #3 – Spending Too Much
Just because you can qualify for a $350,000 mortgage doesn’t mean that you should buy a home that is that expensive. Take a close look at your financial picture and decide how much of a payment you’d be comfortable with. The last thing you want to do is get overextended.

Mistake #4 – Not Having a Rainy Day Fund
Do not put all of your savings into the purchase of your home. It’s important to have some savings available for emergencies. Ask yourself how you would manage the mortgage payment if you were to lose your job. Do you have enough to meet monthly expenses for a few months while you search for another position?

Mistake #5 – Not Getting Pre Approved
Getting pre-approved is easy and it will substantially speed up the process of closing once you decide on a home. The other thing that the pre-approval process will do is ensure that you can really qualify for a home loan. Many times banks say that they can get you approved, but when it comes down to reviewing all the paperwork they determine that they don’t actually have a program that will fit your profile. Take the time to get pre-approved, it’s well worth the investment

Buying a home can be stressful. You can reduce the stress substantially by avoiding the 5 mistakes we’ve outlined above. If you do some homework at the beginning and take the time to shop around you’ll end up saving time and huge amounts of money in the long run.