2a. How Much Can I Afford? October 4, 2024 - 11:42 PM EST

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2a. How Much Can I Afford?

You have to know how much you want to (and can) spend before you go shopping. It's time to take stock of your finances, review your assets, and consider your options, even if you're an all cash buyer and your purchase won't involve a loan.

Lenders are apt to qualify you for as much as they care to lend, which might be more than you can (or should) really afford. It's up to you to take stock of your income and expenses, both current and projected, to determine what you can comfortably manage each month. Along with your mortgage payment of interest and principle, remember to add related insurance costs, taxes, homeowner association dues and any other costs.

You'll also want to catalog things like your cash available for a down payment and closing costs, your assets, and your liabilities. If it's been a while since you took a close look at your total financial picture, don't feel bad, you're certainly not the only one! Being well prepared before you apply for a loan will help you shop for the best terms and conditions, and give you the best chance of obtaining the right loan at the right price.

Estimating How Much You Can Afford

1. Identify your cash and other assets.
2. Tally up your monthly obligations and long-term debt.
3. Create a realistic budget with mortgage payments that are no more than one third of your net income.
4. Don't forget to factor in tax deductions available for homeowners and potential maintenance, repair, or renovation costs.
5. Use our calculators to try some what-if scenarios

If you haven't already, now's the time to tidy up your credit files and see if there're any adjustments you can make to improve your credit score. Be sure to obtain copies of your credit reports from all three major credit reporting agencies, each is unique. In our region, starting September 1, 2005, you'll be able to obtain one free credit report per year from each of the nationwide credit reporting agencies, thanks to a new law enacted to amend the Fair Credit Reporting Act (FCRA). To obtain your report(s) whenever and as often as you like, you can use a fee based service like myFICO.com.

Reviewing your credit record in advance gives you time to challenge missing information, errors, or other discrepancies. If necessary, you can put a statement on your credit report to explain any blemishes you can't cure. Lenders will likely ask you to explain problem areas anyway. Your forethought and attention will let lenders know you're conscientious about your finances.

Avoid These Loan Killers

Until you've closed the transaction on your new property, whatever you do, don't commit one of these frequent loan application busters:

• Buy a big ticket item that depletes your cash or goes on a credit account.
Go on a shopping spree for anything beyond your established spending patterns.
• Open or even inquire about opening new consumer credit accounts, such as at department stores, automobile dealers, jewelry, and furniture stores.
• Use one credit card account to pay off another.
• Close several of your consumer credit accounts.
• Consolidate balances to fewer accounts, if the resulting balance on any one will exceed 30% of the available line of credit on that account.

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