Step 4: Secure Financing

How much home can
you comfortably afford?

It's normal to ask how much you can afford, and you might begin by considering your monthly rent payment. You'll also need to factor in all of your expenses and then revisit your income. Lenders use fairly strict guidelines and formulas to dictate how much you can spend on your mortgage payment, which typically includes PITI, or principal, interest, taxes, and homeowner's insurance.

And if you finance at less than 20 percent down, you'll likely need to pay PMI or private mortgage insurance as well. It's a lot to think about. Ultimately, keep in mind that your lender will preapprove you for a certain amount, but You will decide what you're comfortable paying every month. And you always want to leave room for the unexpected costs and opportunities- from furnishing to repairs to gardening.

Your lender decides what you can borrow.
But you decide what you can afford.

Sarah and Alex each earn $4,000 a month. Traditionally, their maximum housing payments would be 28 percent of their incomes, or $1,120.

However, their financial profiles are really very different, leading them to very different decisions about how much they can afford. See below:

Sarah has $15,000 in student loans, just bought a new car, and has several credit cards with balances.
   
Car payment $350
Student loans $150
Credit card minimum $150
Monthly nohousing debt $650
   
Maximum total debt payment $1,440
(36 percent of $4,000) - $650
   
Safe housing payment $790
Alex's student loans are paid off, he has little credit card debt, and his car is an economy model.
   
Car payment $200
Credit card minimum +$50
Monthly nonhhousing debt $250
   
   
Maxiumum total debt payment $1,440
(36 percent of $4,000) - $250
   
Safe housing payment $1,190

Follow these Six Steps to financing your home:

1. Choose a loan officer
2. Make a loan application and get preapproved
3. Determine what you want to pay and select a loan option
4. Submit to the lender an accepted purchase offer contract
5. Get an appraisal and title commitment
6. Obtain funding at closing

And remember, you don't need to save up a lot of money for the down payment. A conventional mortgage can require as little as a 5 percent down payment, and there are even some first-time buyer programs and FHA loans that require even less. And once again, only you can decide what you can afford.

Loan
Amount
Interest
Rate
Montly
P&I Payment
Total Interest
Paid Over 30 Years
$136,000 8% $998 $223,251
$150,000 7% $998 $209,263
$166,000 5% $995 $192,291

For the last twenty years, the mortgage interest rate averaged approximately 8 percent in the United States. What are the interest rates today and what would your savings be?