When you first consider ownership of a piece of real estate, the thoughts quickly become a passionate obsession. When excited during these beginning stages, most people make their first mistake. They begin to research their desired neighborhoods, recording phone numbers and searching out “For Sale” signs prior to figuring out how much they can really afford. If you’re one of those people, halt. There is more you should be doing first.
Before you ever start calling the agents whose photos appear on the flyers in front of the homes you’re interested in, make certain you won’t be in over your head with decisions that stemmed from excited curiosity. You likely aren’t ready to go look through homes on the market if you’re taking steps in the described sequence. There is a proven way to calculate your mortgage budget, and you need to take that step first, before you undertake anything else.
The very first step you should take before you buy a home is figure out how much you can afford to spend. Treat your relationship with your first home like all relationships: don’t just fall in love with and commit to something if you’re not sure it will be a good fit for your life right now. If this is the first time you’ve had to do this, you can follow these guidelines to figure out how to do it, being honest with yourself about finances and obligations.
Your net monthly income (after taxes), should be calculated first [Figure A]. Then, figure out your monthly debt [Figure B]. If Figure B is more than 1/3 of Figure A, you can stop now. This indicates that you’re not currently ready to proceed. If it is less than 1/3 of Figure A, proceed. Now, tally up all of your monthly living expenses besides your rent payment [Figure C]. Now, move forward to the math.
Subtract Figure C and Figure B from Figure A (A – C = n; n – B = x). Next, take x value, and subtract 25-30% (x x .6 = a). This value (value a) is the amount you can afford to spend on a mortgage payment.
If you think you’re ready, keep exploring. Good luck!
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