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How to Buy a Home

HOW MUCH HOUSE CAN I AFFORD?

To determine how much you can spend on a home, take a close look at your budget. Review your bank statements and spending habits for the last couple of months to figure out how much you are spending on everything from cellphone bills to restaurants. The Consumer Financial Protection Bureau offers a spending tracker that can help you figure out where your money is going each month.

Once you have a better picture of your spending habits, determine how much you want to allocate toward a monthly home payment. This figure includes your principal, interest, tax and insurance payment, which add up to your monthly mortgage sum.

The Federal Housing Administration formula, used by many lenders, recommends allocating no more than 31 percent of your monthly income to your housing payment. This figure will change based on your amount of debt. Buyers with no other debt may be able to budget as much as 40 percent of monthly income to housing. (But remember that the rest of your budget is going to have to go toward heat, water, electricity, routine home maintenance and food.) Overall, your total debt-to-income ratio, including car payments and credit card bills, should not exceed 43 percent.

So, for example, if you make $50,000 in annual gross income, your monthly gross income is $4,167. That should leave you with $1,292, or 31 percent to devote to your monthly mortgage, provided your overall debt does not exceed $1,792 a month.

But remember that besides the mortgage, buying a home includes additional one-time payments that can quickly add up, including closing costs, legal fees and other expenses associated with buying, such as a house inspection. And don’t forget about moving fees or home improvements.