Are you ready to make the home-buying commitment? There are lots of pros and cons revolving around buying a home versus renting one. The old advice that home buying always pays off is no longer automatic in all parts of the country and for some people.

Rent or Buy? You should rent:   If you don’t want the bother of home maintenance and repair   If rental rates in your area are low (compared to home prices)   If you plan on moving around a lot because of job or other commitments You should buy:   If you want to take advantage of (recently very high) equity appreciation   If you want the interest and tax write-off from a home   If you want added security and privacy While you can spend a lot of time debating the rent versus own question, my suggestion is that if you’re even remotely interested in a home purchase, you at least move forward enough to find out what you can afford. After all, you can always opt out to stay/become a tenant.

Can I Afford to Buy a Home? Once the decision to investigate buying has been broached, it becomes a matter of determining what you can afford. To find out, most prospective home buyers usually begin the traditional task of putting together a budget of their income and expenses. Their two big questions are, “How much money will I have to put toward a monthly payment? How much money do I need for a down payment and closing costs?” Unfortunately, this is like putting the cart in front of the horse. My suggestion is to stop, take a deep breath, and rethink. What your budget tells you at this stage is moot. Today it all comes down to what the lender says you can afford how big a mortgage the lender is willing to give you. (It could be for 100 percent of the purchase price!) After all, you can always borrow less than a lender’s maximum (to reduce your monthly payment, for example). But, it’s very hard to borrow more. If you bought a home in the past, say ten years ago, it may seem odd to go to a lender first, before you even do your own budgeting. But be aware that the process of buying a home has changed. Today your budget needs to come later. Your first questions should be, “How big a loan (and monthly payment) can I get?” For that information, you must contact a lender directly.

You can only get the answer to how big a loan and monthly payment a lender will offer from a lender. Don’t make the mistake of thinking you can fill out a quiz in a article, go through some formulas, and get that information. Neither I nor any other author can realistically tell you what you can afford without knowing your specific financial information and without submitting that to a lender. Therefore your first step is an easy one. You find a lender and get “pre-approved.” (This is something you will need to do in any event in order to get home financing, so it’s not a wasted or extra step.) Pre-approval takes perhaps a half an hour or so of your time. You contact a lender or mortgage broker (see where to find them in Article 4), fill out an application, provide some documentation, and that’s it. It might cost you $35 for a credit report (or it might not, depending on how good your lender/mortgage broker is), but that’s really a very small investment. You’ll have your answer in a few days or less.

What Does Pre-approval Do

for Me? You’ll find out how big a monthly payment you can qualify for, the maximum size of a mortgage you can afford, and what size down payment you’ll need. (If you even need a down payment in many cases no-down financing is available; see Article 4!)

Today virtually all lenders will take a look at your credit history, your income, and your assets and then, based on underwriting standards, issue you a “pre-approval” letter. It will typically state the biggest monthly payment their computers say you can afford. If they’ve actually gotten a credit report on you, checked with your employer, and looked at your bank statements, this is a pre-approval commitment that you can “take to the bank.”

“QUALIFIED” On the other hand, a mortgage broker or even a real estate agent can ask you a couple of financial questions over the phone and then send you a “pre-approval” letter. However, if your credit report wasn’t checked, if your income and assets weren’t verified, if underwriting standards weren’t applied (and if it wasn’t issued directly by a reputable lender), it probably isn’t worth the paper it’s written on. The reason is simple; no lender will back it up.

Can I Rely on What the Lender Says? Yes. And no. Yes, in the sense that today lenders use highly sophisticated computer models based on hundreds of thousands of actual case histories to determine what makes a successful borrower. Where you fit in that financial profile determines the maximum amount that you can borrow. And if you fit the profile of a successful borrower, chances are excellent that you will be one. On the other hand, if you fit the profile of someone who’s likely to lose the property to foreclosure, then you might reconsider renting. However, the one thing the computer and the modeling and the profiling can’t tell you is how big a monthly payment (and how big a mortgage and price) will be within your comfort level. For example, the computer may spit out that you can afford a $3000 monthly payment. But, you know from experience that making a house payment of more than $1500 would keep you from sleeping at night. Who’s right? You or the computer?

TIP STRETCHING MAKES SENSE

IN AN “UP” MARKET If you are looking at homes after having been out of the market for quite some time, you’ve probably run into “sticker shock.” The prices for today’s home can be much, much higher than you paid for your old castle. However, your income may have increased sufficiently to handle the new price/payments. Further, even if you have to stretch to make the payments, if the market is moving up, it might be worthwhile. In a rising market, the value of your new home, and your equity, will quickly grow.

Try a Reality Check Okay, now it’s time to take a realistic look at your budget. What can you really afford? It’s not hard. Just calculate your total spendable monthly income. That’s what you get after taxes, alimony, and other amounts are taken out. Now subtract what the computer says you can afford monthly and see what’s left. Can you really live on that for a month?