How much can I afford to pay for a home?

To establish 'affordability' you need to determine your taxable income together with the amount of any debt outstanding and the monthly payments. Assuming you are purchasing a principal residence, calculate 32% of your income for use toward a mortgage payment, property taxes, and heating costs. If applicable, half of the estimated monthly condominium maintenance fees should be included in this calculation also.

Next, calculate 40% of your taxable income and deduct all of your monthly debt payments, including car loans, credit cards and lines of credit. The lesser of the first or second calculation will be used to help determine how much of your income may be used towards housing related payments, including your mortgage payment. These calculations are based on lenders' usual guidelines.

In addition to considering what these calculations indicate you can afford, determine how much you think you can afford. If the amount you are comfortable with is less than 32% of your income you may want to settle for the lower amount rather than stretch yourself financially. Ensure you don't leave yourself “house poor” and unable to enjoy your new home and lifestyle. Structure your payments so that you can still afford simple luxuries.

What you can pay for a house will probably depend on how much you already have in cash and how much you can reasonably borrow in a mortgage.

Important notice: When figuring out the cost of the house, be sure to factor in the closing costs, which will be about 2%-5% of the purchase price.