It's the question you need to ask yourself before you even begin your new home search. How much you can afford is the most important factor in determining where and how you look for your new home. You don’t want to purchase a home that will leave you overextended.  To make sure that the house you are thinking of buying is going to be affordable, make sure you do your research and budgeting before you sign the paper work.

There are many factors that determine how much you can borrow, but it is the amount of your monthly payments, however, that will ultimately decide how much home you can afford. The general rule of thumb is that your mortgage payments should not exceed 28 percent of your income. Your entire debt-to-income ratio, which includes all recurring debt, including mortgage, car loan, and credit card payments, should not exceed 36 percent of your income.

Most people can afford a home that costs up to three times their annual household income, if they can make a 20% down payment and have only a moderate amount of other debt. If you have little to no debt and can put 20% down you can probably buy a house worth up to four times your annual income. Calculate how much house you can afford with this home affordability calculator.   Enter your income, liabilities, and debt, as well as your new loan assumptions to see an estimate of how much you can potentially afford for your new home.

When it comes to deciding how much you can afford to spend consider the following:

  •  Make sure you get pre-qualified or pre-approved for your loan before you start looking.
  •  Be sure to figure in moving expenses if you buy a home in a different city. If you move to another region of the country, you may also face a change in the cost of living.
  •  If you buy a condo or a home that requires you to join the homeowner's association, your monthly dues will directly reduce how much you can afford to spend on a home. Some dues can be very costly, be sure to include the cost into your budgeting.
  •  Remember to assess and figure in the costs for any remodeling and repair projects.

If you're considering a new home purchase, it is crucial that you spend time calculating what you can truly afford. Remember, just because the bank says they will give you a certain amount of money, that doesn't mean you can actually afford it. Everyone's situation is different, and by planning ahead to ensure you're not overextending yourself, you can make it through the difficult times