How Much Home Can You Afford?

The first step in finding a home is figuring out how much you can afford to spend. We'll look at several different factors to consider when making this decision.
Taking out a mortgage is probably the biggest challenge facing prospective homeowners. The lender will want to ask you all sorts of nosy questions about your income and savings (or lack thereof), and then might not even lend you as much as you need. Of course, there is a reason for this. Put yourself in the lender’s shoes: If you were going to lend people money, what would you want to know about them? Basically, you'd like to know 1) if they make enough money to pay you back, 2) if they've been trustworthy in the past, and 3) if they have something of value should they be unable to pay you back
Do you make enough to pay the lender back?
Your lender will want to know how much money you make. Also, what are your other debts? Do you owe money for college loans or credit card charges? Do you have any other assets? Ideally, you will want to come up with at least 20% of the value of your new home as a down payment, to avoid things like mortgage insurance payments. But, you probably qualify for plenty of financing arrangements that will get you into a new home for as little as 0% of the asking price The lender will also plug your income numbers into a couple of formulas: the front-end ratio (having to do with your mortgage payments) and the back-end ratio (having to do with your debt) to come up with your debt-to-income (DTI) ratio.
Have you been trustworthy in the past?
What is your credit rating? Your credit report -- a nifty little compilation of your personal financial history -- will reveal whether you have a track record of paying your bills on time. If not, there are ways to clean up your credit that will make you more attractive to lenders.
Do you have any collateral?
The house you buy will generally be considered collateral for your mortgage. As a result, in case you can't repay the loan, the lender can decide to do foreclose on the mortgage and repossess the house
What are your considerations?
Now, let's look at a few things from your point of view.
Your Timeline
To determine whether you should buy a new home, think about how long you're planning to stay in it. It generally doesn't make economic sense to buy if you are only planning to stay there for a couple of years. Why? Because you are going to be paying fees to buy and then to sell your house. It would have to appreciate in value very quickly between the time you buy it and the time you sell it to make it financially worthwhile.
Your Comfort Zone
Before you borrow $90,000, $200,000, or whatever you need for your mortgage, figure out whether you can really afford it. Just because the lender will loan it to you, doesn't mean that you will want to live your life in such a way as to be able to pay it back. Are you planning to have a big family? Would you rather replace your econo car with a new Mercedes? Your house payment is just one piece of your financial puzzle. What might you need to give up to make that house a reality and are you really willing to do it?