House hunting: Know the budget before you start

Buying a house can be a minefield of high hopes and dashed expectations. Figuring out exactly how much you can spend before you start will make it a lot easier.

By Trent Hamm,?Guest blogger / August 21, 2012

A new home is shown for sale in a development in Pleasant Hills, Pa.in this Jan. 2012 file photo. Hamm suggests getting pre-approved fro a mortgage loan so you'll know exactly how much house you can afford before the search begins.

Gene J. Puskar/AP/File

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When Sarah and I first had a sense that we might be interested in buying a home, we simply opened up the real estate listings and started looking.

Skip to next paragraph Trent Hamm

The Simple Dollar is a blog for those of us who need both cents and sense: people fighting debt and bad spending habits while building a financially secure future and still affording a latte or two. Our busy lives are crazy enough without having to compare five hundred mutual funds ? we just want simple ways to manage our finances and save a little money.

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We didn?t discriminate too much, but we did find ourselves mostly looking at more expensive homes. We would wander through some higher-end house and imagine rooms done up as nurseries and other rooms done up as the bedroom of a younger boy and we?d smile and dream.

Eventually, we came to realize that our daughter was going to arrive on the scene sooner rather than later and we needed to get serious about the house hunting. We started figuring out what we could actually afford.

Our back-of-the-envelope calculations were a bit disheartening. Then, we went to a lender to get pre-approved for a loan.

The amount we got pre-approved for was less than any home we had looked at up to that point. We had to completely start over with our home search, with significantly readjusted expectations.

For starters, we had wasted all of the visits we?d made to houses before we went to the lender. All of that time, when we thought we were figuring out just what we wanted and identifying some prospects, was more or less for naught. None of the homes we looked at were ones that we could actually afford.

Beyond that, we had to readjust our expectations, too. When we began to look at houses in our realistic price range, we couldn?t help but notice the differences between those houses and the ones we were previously looking at. It took us some time to adjust our expectations for the house we would get.

It?s very likely that we didn?t give a fair shake to some of the homes we looked at after our price adjustment, simply because we were still comparing them to the expensive homes.

A much better approach would have been to know what we could afford before we even started looking.

How could we have done that? The easiest method would have been to simply go to a lender or two and get pre-approved for our mortgage. This would have made it clear what the bank would lend to us.

Beyond that, calculating how much house you can really afford is a very wise move. You should not be investing more than 25% of your salary each year into mortgage payments. Some sources offer a higher percentage as a guideline, but I see no good reason to push your luck on a major purchasing decision like this one.

Calculate your family?s salary per year, then divide that by 48. You?ll see how much your monthly mortgage payment should be at most. Then, use a mortgage calculator to figure out what monthly payments look like for various amounts, interest rates, and terms so you get a feel for what you?ll be paying. I strongly encourage sticking with fifteen year mortgages.

If you start your search in a realistic place, you?re much more likely to find a property you?ll love as well as easily afford. Start off in the wrong place and it could be a very long search, indeed.

This post is part of a yearlong series called ?365 Ways to Live Cheap (Revisited),? in which I?m revisiting the entries from my book ?365 Ways to Live Cheap,? which is available at Amazon and at bookstores everywhere. Images courtesy of Brittany Lynne Photography, the proprietor of which is my ?photography intern? for this project.

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