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?
TIP—DON’T FORGET TO FACTOR
IN TAX AND INTEREST
DEDUCTIONS
Remember,you candeduct the interest on your mortgage (up to very high limits) and your property taxes from your ordinary income. By adjusting your W-4 form with your employer, you can factor this in and get a higher monthly take-home paycheck. Be sure to ask your accountant.
Your Reality Check
Take home pay (after increasing for mortgage interest and property tax
deductions) $______
Monthly payment (including taxes and insurance) as determined by the lender $______
What’s left for you? $______
Few people want to radically change their lifestyle in order to buy a home. Those with long memories will recall families in the 1970s who bought homes and then sat on the floor inside because they couldn’t afford furniture. Nobody wants to be in that position. So be realistic with the numbers.
Take a few minutes to determine what your actual monthly living expenses are. Don’t forget medicines, entertainment, eating out, and so on. On the other hand, for a home that might bring you strong appreciation (read profit) in the future, you might very well want to give up trying to live a princely lifestyle. What you need to decide is what you can live without, and what you absolutely must have. Here’s a chart to help you figure it out.
Budgeting to Determine How Big a Payment You Can
Afford
Income
$___________ Net*
$___________ Increase after calculation for interest and property tax
deductions
$___________ Increase after eliminating voluntary deductions
Less Expenses
$__________ Utilities (Gas, electric, water, garbage) $__________ Phone
$__________ Cable/Satellite TV
$__________ Auto (Lease/Purchase pmt., ins., gas) $__________ Food
$__________ Entertainment $__________ Clothing
$__________ Child Care
$__________ Tuition (private schools)-
$__________ Maintenance (gardening, painting, etc.) $__________ Repairs
$__________ Child Support/Alimony
$__________ Medical (services, drugs)
$__________ Recreation (gym, sports, etc.) $__________ Unpaid credit card debt** $__________ Long-term loans
$__________ Total
$___________ Income Available for Mortgage Payment
*It’s important to remember that your net monthly income is after voluntary deductions such as 401K contributions, which can be reduced or eliminated. Also remember, some of your involuntary deductions, such as for taxes, should be reduced because of the deduction you’ll get for home mortgage interest and taxes, thus increasing your take-home pay. (See Chapter 2.)
**Unpaid credit card debt is the worst type of liability because it’s paid back at extraordinarily high interest rates. Try to pay this down
or refinance it into long-term debt before moving to make a home purchase. Lots of credit card debt may cause lenders to reject you for a mortgage.
Add up all of those monthly items you must have. Now compare the total to “what’s left for you” after making your house payment, as determined earlier.
Reality Check 2
What’s left for me $______
What I must have to live on $______
If “What’s left for you” is bigger, congratulations. The lender’s
computer was right and you can easily make those monthly pay-
ments!
If “What you must have to live on” is bigger, whoa! You’ll either have to tighten your belt more, or you’ll have to reduce your monthly payment, cut back on the size of your mortgage, and purchase a smaller house. Or reconsider renting.
Life Is Making Choices
You still have other options. In later chapters we’ll see how to get sellers to reduce their price. We’ll look at mortgages that require nothing down, indeed, that even pay some of your closing costs! We’ll see how to rent-to-buy. And more!
Nevertheless, at some point you’ll have to return to the above comparison and one way or the other, make “What’s left for me to live on” fit under, “What I must have to live on.”
You might want to come back to this chapter several times as you go through this article learning different tips and traps when buying and make the comparison anew. Remain confident, however. Almost everyone eventually decides to go forward and buy a small home, once they know the trick of how to go about getting it.
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