The first step in finding a home is figuring out how much you can afford to spend. Here's a quick review of several different factors to consider when making this decision.
The mortgage
Taking out a mortgage is probably the biggest hassle facing prospective home owners. The bank 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 bank'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 not only how much money you have, but how much you will likely make over the next 30 years. Also, what are your other debts? Do you owe money for college loans or credit card charges? Do you have any other assets? Things like stocks and mutual funds or personal property like a boat or a car are also considered in figuring out how much a bank will lend you. Lenders throw a bunch of these numbers into several formulas to see how you score.
Have you been trustworthy in the past?
What is your credit rating? The three major credit reporting agencies are Experian, Equifax, and Trans Union. You can request credit reports individually from each agency -- or order from all three agencies in one easy step at TrueCredit.com.
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. We walk you through the steps, provide an overview of the credit scoring process, and offer tips on how to maximize your score in our Credit Center.
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 bank can decide to do something really nasty: foreclose on the mortgage and repossess the house.
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 planning to stay there for just a couple of years. Why? Because you're 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 bank will loan it to you, doesn't mean that you will 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 Chevy Cavalier with a new Mercedes? Your house payment is just one piece of your financial puzzle.
Should you rent instead?
What if you're renting? Would you be better off in a home you own, from a month-to-month financial standpoint? There are tax advantages that make buying a home more affordable than you might imagine. Head on over to our calculators page to get answers to such questions as "Am I better off renting?" and "How much can I borrow?"
You'll find more home-buying guidance and tips in our Home Center. Don't forget to also check out the Fool Mortgage Center, where you'll find links to several mortgage lenders offering attractive rates. If you're looking for answers to specific questions, drop by our Buying or Selling a Home discussion board.
