If you are looking to buy a new house, one of the first things you will want to do is to determine how much a house you can afford. We’ve included a home affordability calculator here. in order to get an accurate estimate you will need to take a careful review of your finances and to calculate your income, expenses and outstanding debt.

Here’s a quick guide on how to make those calculations.

1. Calculate your income.
• Add up your monthly salary, and if applicable, your co-borrowers salary. If you or your co-borrower expects your incomes to change in the next few years, work that into the calculation. But be both realistic and conservative with these projections. For instance, if you are currently a paralegal about to pass the bar and become a full-fledged lawyer in a year, you should work the anticipated salary increase into your projections. But be careful not to over-estimate your salary projections. For instance, it is much better to project a $2,500 salary hike next year and actually receive a $5,000 raise than vice-versa.
• Include any income you expect to receive from investment dividends or interest payments.
2. Calculate your Debt.
• Track all of your monthly expenses. Include such things as rent (or mortgage payments if you are already a home owner), Utilities, car expenses, insurance, as well as any monthly child support payments.
• Also include your monthly payments on any outstanding debts you have, such as a student loan, car payment, credit cards or another form of personal debt. Of course, if you are close to paying off a debt, make sure you include that in your long-term projections. For example, if you are10 months away from making your last payment on your car loan, figure that the amount of that payment will be going to your mortgage after that period.

By taking a fair and honest assessment of your income and debts, you will be able to more effectively use a home affordability calculator, and will have a better estimate of what you can afford.

By David Plowman

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