Figure Out How Much You Can Afford

Before you start looking for your dream home, let’s find out how big you can dream. Knowing your true budget is the first and most important step in buying a home. Why? A home is a big purchase. It’s probably the most expensive thing you'll ever buy and there are lots of expenses you might not even know about. Everybody’s total costs are different, but it’s almost guaranteed you won’t have that much money saved up. Hopefully you have enough for a nice down payment, but for the rest…

• Yes, you need a mortgage
• How much will a bank will lend you?

The first step in determining how much a bank will lend you is to understand how much you can afford each month. This is determined using two lending principals.

The first lending principle is that your monthly housing cost should not exceed 32% of your gross monthly family income. This principle is known as the Gross Debt Service (GDS) ratio calculation.

The second lending principle used, the Total Debt Service (TDS) ratio calculation, is that your monthly housing cost and payments on all of your other debts (including loans, credit card and lease payments) should not exceed 40% of your gross monthly income.

Next step: Decide What You Want to Buy

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