When first time home buyers begin thinking about purchasing a home, their first thought is usually, “Can I afford it?” or “Do I have enough money?” These are valid questions, and do need to be answered before you begin your home search.

The first step in the process of purchasing a home should be visiting with a lender or mortgage broker. They will be able to go over your finances with you and determine how much home you can afford.

Important things to keep in mind while gathering your financial information and meeting with a lender:

• You need a steady (and reliable) source of income, and you’ll need to prove that you’ve had a steady source of income for the past 2 or 3 years.
• It, of course, helps to have good credit. (To make sure your credit is good, pay your bills on time, and try to have few outstanding debts!)
• Keep in mind that you’ll have to pay your mortgage bill each month.
• The more money you can put down on a home — AKA, the down payment — the better. More down payment funds equals less of a loan from the bank, and less money you’ll have to pay toward interest throughout the life of the loan.
• You will not only need finances for the down payment, but also for closing costs, which your lender can determine for you. Closing costs include things such as fees, title search, writing the deed, etc.

In essence, the lender determines the maximum loan amount that you can afford through this process (via The Department of Housing and Urban Development, or HUD):

The lender considers your debt-to-income ratio, which is a comparison of your gross (pre-tax) income to housing and non-housing expenses. Non-housing expenses include such long-term debts as car or student loan payments, alimony, or child support. According to the FHA, monthly mortgage payments should be no more than 29% of gross income, while the mortgage payment, combined with non-housing expenses, 4 should total no more than 41% of income. The lender also considers cash available for down payment and closing costs, credit history, etc. when determining your maximum loan amount.

For more information about the process of buying a home, visit our For Buyers page, or HUD’s Q&A page for home buyers.