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Many Things Need to be Taken Into Account When Calculating Your Home Purchase Budget

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By : marco benavides    99 or more times read
If the financial and real estate crisis we have been going through for what seems like forever have taught us anything, it is that overstretching our home purchase budgets to get into a home can lead to financial ruin. Things have been blamed on home buyers trying to get into too much house, but lending practices were much looser, and they both contributed to what we are now seeing.

We should also have learned the importance of setting a home purchase budget, and that means being able to do a fairly accurate calculation. Doing the math is not really as difficult as it may seem because you can use the same formulas that lenders are going to use.

However, before you even start thinking about the math, sit down and write the things you actually need in the house you would like to buy, and then make a list of the things you would want your house to have. If you look at the homes with the things you need and the ones with the things you want, you are going to find that the ones with the things you want can be much more expensive.

Before you set your budget, bring your wish list down to something much more reasonable so that you do not end up trying to get into much more house than you can actually afford. If you stay within your means and needs, you will not place yourself at risk of losing your home if you should have some expense come along completely out of the ordinary.

Establishing your budget is as easy as following what is called the 20/28/36 rule or debt-to-income ratio, which is what lenders will use in their calculations. You have to determine your gross annual income because it is what will guide you and let you know how much house you can get into.

The first number in the rule is not actually calculated from your annual income. It stands for 20%, and it is the amount of money you should use for a down payment; 20% percent of the home's selling price. If you can put more toward the down payment, you can lower your monthly payments, so it is something that you should really consider thoroughly.

The number 28 is actually 28% of your gross annual income, and it is the maximum amount that should go to paying the mortgage, real estate taxes and fees. The last number is 36% of your gross income, and it is how much of your annual gross earnings should go toward paying your debts and mortgage.

The lower the percentages, except the 20%, the better off you are going to be because you will be able to meet all of your financial obligations. You will be lowering the risk of losing your home if some financial hardship should come along and bring some hard times. On the other hand, if you are already stretched way too thin, any type of hardship will end up causing financial ruin, and it will perhaps even lead to you losing your house.

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