It is nice to circle around homes you want to own or browse on several real estate listings. But once you see how much these houses cost, it can get very frustrating. Buying a house can stop right here, that is, if you do not have a good idea of what to do and things to consider when buying a home. Now, if you decide to continue to own your dream house, here is the most important question you should answer: what can you afford?

Buying a home is a matter of choice. But most of the time, you cannot simply point your finger to the most desirable home in the most ideal neighborhood in town, right? Especially if you realize the amount of money you should possess in order to buy it. What is unfortunate about this is that you have to settle on what you can afford, which, may lead you to another frustration. Thus, making sure first that you know your financial limits is your very first step towards owning a home.

There are 3 main factors to consider when you want to know how much you can afford:

1. How much money you have on hand for the down payment and the closing,
2. How much home mortgage and interest you can afford, and
3. The amount of loan the lender will approve.

Savings is very important, especially if you are preparing to buy a home. And a good savings can give you better chances of owning a better, more expensive home. This is because the amount of the down payment you can afford will definitely reduce the remaining cost you have to pay for the house, which in turn reduce your home mortgage, making monthly payment more affordable. Thus, it is advised that you save as much money as you can for down payment in order to afford a bigger home or to lower your home mortgage. However, this does not mean that you cannot own a house if you do not have sufficient amount of savings. Down payment can go anywhere between 5% and 20%. So you can still get a deal even if you can afford to pay 5 percent of the total purchase price for the down payment. You just have to make better consideration on the cost of home mortgage. Because ultimately, your monthly payment will be the determining factor of what you can afford (it will be discussed below). Closing cost can run somewhere between 2% and 6%.

The answer to the question of how much home mortgage and interest you can afford lies on two major factors: (1) your monthly or annual income and (2) your monthly debt obligation such as car loan, child support payment, credit card payment, etc. Ideally, the payment-to-income ratio should not exceed to 28% and your debt-to-income ratio should not exceed to 36%. Payment-to-income ratio and debt-to-income ratio are used by most lenders to determine how much you can afford.

For example, if you are earning, say $6,000 a month, your mortgage payment should not exceed to $1,680 and your total debt should not exceed to $2,160. Any more will put a great stress to your financial standing.

The amount of loan the lender will approve will depend on your income, credit report, and other factors. This is why, in order to get a reasonable amount of loan, you got to have a good and permanent source of income and good to excellent credit score. Although loan can be approved to people with bad credit rating, the interest can be surprisingly high.

If you want to know exactly what you can afford, there are several online mortgage calculators you can use for free.

It is not very often that you buy a home. In fact, most of us might be able to buy a home once in our lifetime. So when you do, you want to the process to be as smooth as possible. Consider first how much you can afford before you look on the listings and circle around houses that you want. And oh! Do not forget to seek professional advices from lending consultants and get pre-approval make the whole home buying process easier and convenient.