Why is it so important to know how much you can afford to spend on a home?
First, you don’t want to buy a property and then find out, after you’ve moved in, that you can’t financially maintain it. That would mean having to resell it under stressful conditions.
Second, you don’t want to settle for a property that’s less than ideal, when you really could have afforded the "dream home" you’ve always wanted.
So how do you figure out how much you can afford to pay for your next home?
The first step is to gain a clearer understanding of how much your current home will likely sell for in today’s market. That amount, together with other financial resources you might have (such as savings), will determine your available down payment.
The next thing you’ll need to figure out is the maximum amount of mortgage for which you qualify.
Say, through the proceeds of the sale of your home combined with your savings, your expected down payment is $150,000. If the lender authorizes a mortgage of $375,000, then you can afford a $525,000 home.
Typically your lender determines your maximum mortgage based on, among other things, a percentage of your income, to ensure you can maintain the property.
It’s worth doing your own calculations too. Calculate your anticipated utilities, insurance, and property tax, and make sure you have some money set aside for unanticipated expenses.
Of course, you don’t need to spend as much as you qualify for on a new home. A home that meets your needs in terms of property type, features, and neighbourhood, may in fact cost you less.