How Much can I Afford?

Before you start looking at homes, you need to determine how much house you can afford. A general guideline is that you should spend no more than 28 percent of your total household income on housing expenses and no more than 36 percent of that on your total debt (all credit cards, loans, and mortgage). For example, if you make $1,700 a month, try to keep your household expenses at about $476 ($1,700 x .28 = $476).

To find out how much home you can afford, contact a bank or lending institution in your area. They will help you look at:

• Your present budget
• Down payment requirements
• Closing costs
• Monthly mortgage payments, taxes, insurance, and other costs
• Types of mortgages

You may also want to contact the Fannie Mae Foundation (see Resources section for contact information) and ask them for two free guides that may help make your decision-making easier:

• Opening the Door to a Home of Your Own explains the home-buying process, including information on financing and mortgages.
• Choosing the Mortgage That’s Right for You will help you learn about shopping for the right mortgage.
  

To find out how much a home loan would cost you each month, click here to go to a mortgage calculator. By entering the annual interest rate you expect to pay (someone from a bank can provide you with this rate), the term of the loan (how many years it will take to repay the loan, such as 15 years or 30 years) and the amount of the loan, you can find out approximately how much your monthly mortgage payment will be and know if it fits within your budget.

There will be other expenses too—ones you are not paying now if you rent a place to live. These include:

• Homeowners’ insurance. Insurance protects you from financial loss if your home is damaged or destroyed by a fire, vandalism, tornado, or other event. There are many types and features of homeowners’ insurance policies. Most provide some coverage for the following:
• The building
• Belongings in the house (such as furniture and clothing)
• Accidents that occur on your property
• Taxes. Your county tax assessor’s office may be able to provide you with the annual amount of taxes you can expect to pay on a home in the area in which you would like to buy a home. If you build a home, the county assessor’s office may be able to provide you an estimate based on the location and the estimated cost of your house.
• Utilities. Check with your local utility companies for information about rates for electricity, gas, and water. Also check into costs for garbage collection and sewer fees.