Home budget and affordability

Start from the full monthly bill

A mortgage payment is often quoted as principal and interest. The bill you actually pay usually also includes property tax and homeowners insurance collected through escrow, mortgage insurance if you put down less than 20 percent on a conventional loan or use FHA, and homeowners association dues if the property has them. Then there are costs that never appear on the mortgage statement: utilities, trash and water bills that a landlord may have covered, lawn care and snow removal, and money set aside for repairs.

A useful habit is to write every one of those lines next to your current rent and renter's insurance. The difference is what changes in your monthly life, and it is often larger than the difference between rent and principal and interest alone.

The two ratios lenders look at

Lenders measure your ability to repay with debt-to-income ratios. The CFPB defines the ratio as all your monthly debt payments divided by your gross monthly income, which is income before taxes and deductions. Lenders often look at the housing payment by itself as well as the total including car loans, student loans and card minimums. Each loan program and lender sets its own limits, so a ratio is a screening tool, not a verdict.

Your own comfortable ratio may be lower than the lender's maximum. Gross income overstates what reaches your bank account, and the ratio ignores childcare, groceries, commuting and saving for retirement. The guides in this file show how to compute both ratios and how to stress-test them.

Cash is a second budget

Buying takes cash at several points: an earnest money deposit when your offer is accepted, the inspection and appraisal, the down payment and closing costs at the table, and the first wave of moving and repair spending. Some buyers stretch to the largest possible down payment and arrive at closing with nothing left. A home with an empty emergency fund is fragile; one broken water heater can send a new owner to a high-rate credit card.

Plan the cash in three piles: what you bring to closing, what you keep as reserves, and what you expect to spend in the first three months. If the piles do not add up, the answer may be a lower price, a different loan program, help from an assistance program, or more time.

When the numbers say wait

A budget can tell you that buying now would leave you stretched. That is useful information, not a failure. Renting longer while you pay down a car loan, rebuild savings or let your income settle can make the eventual purchase safer. The rent-or-buy guides in this file treat waiting as a real option and show how to compare the two paths with your own figures rather than rules of thumb.

Three budget mistakes to avoid

• Starting from the approval. A lender's maximum tells you what the program allows, not what your household can carry. Start from your own monthly limit and work up to a price.
• Leaving out the non-loan costs. Property tax, insurance, mortgage insurance and association dues can add hundreds of dollars a month. Use a full payment in every comparison.
• Spending the cushion. A budget that only works with every dollar of savings at the closing table has no room for the first repair.

How to use this file

Read the affordability guide first. It walks through a complete household example and links to the small calculators. Then open the guides that match your situation: a single income, student loans, uneven pay, or a move from a low-rent area to a higher-cost one. When you have a target price range, carry it into the preapproval and loan files so that the conversation with a lender starts from your number rather than theirs.