Don't Bust Your Budget!

For many of us, buying a house well above our budget could mean financial ruin down the line. To get your home search started on the right foot, find out what you can afford. Looking at homes before you know your limits can lead to discouragement and frustration—which is not the way you want to start your journey.

Start running the numbers to get an idea of your home-buying budget. Your total debt payments (car payments, student loans, etc.) plus your possible mortgage payment—including principal, interest, taxes and insurance—shouldn’t be more than 40% of your income before taxes.

Make a list of your monthly debt (this doesn’t include things like groceries or gas; just loans and credit cards) and start crunching the numbers. Don’t forget to add in property tax; you can get that information from your county. The usual rule of thumb is to keep all monthly home payments to 28% of your gross monthly income. While you’re crunching these numbers, it’s probably also a good time to check on your credit score, as this will have a lot to do with what kind of mortgage you can get.

Also, look at your cash situation. On top of lining up your down payment (which ideally should be 20% of the price of a house), you should factor in a cash cushion for all the things you’ll have to pay for when you move in and maintain the home.

Once you have these numbers ready, you can look at home prices. Look for a home that costs approximately two and a half times your gross annual salary. If you have higher or lower debt or other obligations, the price of the home you can afford will also have to adjust.