Estimate Your Price Range

When planning to buy a home, you might dream about the perfect kitchen, bathroom, or yard. That’s great, but keep in mind that one of the first things your “perfect” home should have is a price tag that won’t keep you up at night worrying about how you’ll make your monthly payments.

Estimating your price range is the first step toward finding a home at a price that will allow you to sleep soundly at night. To help you find your price range, you need to check your credit score (and improve it, if necessary), figure out how much money you have for a down payment, and determine a reasonable monthly payment for yourself.

Step 1: Check your credit
Imagine that a friend asks to borrow money from you. Assuming you had the money to loan, you might then ask yourself, “Did he pay me back the last time he borrowed money? Did he pay me back the full amount? On time?”  When you approach banks and lenders for a loan, they go through a similar analysis, but since they don’t know you personally, they use your credit history to determine whether you will be a responsible borrower. Lenders learn about your credit history by looking at your credit report.

Step 2: Determine your monthly housing budget
Mortgage lenders have traditionally expected borrowers to have a housing expense ratio of 28% or less. The housing expense ratio is an indication of a borrower's ability to make the payments on their mortgage loan. The ratio measures housing expense as a percentage of gross income (income before deducting for Social Security, Medicare, and taxes).

Step 3: Determine your down payment
When you buy a home, it is typical for you to provide some of your own money in addition to the money you take out on loan. The money you provide of your own is considered the “down payment.”

Step 4: How much house can you afford?
The amount you can afford to pay for a home depends on your income, the amount you must continue to pay on other debts, the amount of cash you have for the down payment and closing costs, and the interest rates available to you.

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