How to determine your housing budget

So you’re mentally ready to buy a house, but you’re not sure how much home you can afford financially? Determining your housing budget can be a scary and often difficult process, but with a few key steps, you’ll be on your way to purchasing a house within your means. Here are a few tips from financial planner Susan Bruno, the driving force behind the women’s financial blog, DivaCFO.

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Step 1: Determine if you’re financially ready

You’re going to have to do some math if you want this home purchase to be successful in the long run. Bruno suggests by starting with the 20/28/36 rule. First, you must be able to put at least 20 percent down on the new home.

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“You can afford at least this much,” Bruno says.

If not, maybe it’s time to reconsider a home purchase. If credit card bills are stacking up, maybe it’s not the right time for a home purchase. If you can afford 20 percent, moving on to the second number is easy. No more than 28 percent of your gross income should go to mortgage, homeowners fees, insurance and real estate taxes, Bruno says. If you have that down, then the last number comes into place. No more than 36 percent of your gross income should go to all debt, including cars, student loans and credit cards. There’s room for some leeway, but if you want to continue to save for emergencies and retirement, this formula is your best bet.

Step 2: Get prequalified for a loan

You’ve found that perfect house and you’re ready to head out the door and get a loan, but when you get to the bank, you can’t get the cash for the particular house. Save the disappointment, Bruno suggests. “[Getting prequalified is] easy and very helpful before you get your hopes up on that dream house that isn’t in your budget.”

Step 3: When in doubt, dole the work out

So maybe this home-buying stuff isn’t easy for you. We can’t blame you. A lot of hard work goes into determining what home and what price is right for you. It never hurts to have a little help, Bruno says. “Work with a mortgage broker who comes highly recommended by trusted friends and advisors, and dig in. Educate yourself. After all, this is likely going to be one of the biggest purchases of your life, so don’t be lazy about it.” They’ll ask you the hard questions about what kind of home you want to purchase and the personal details about what you can realistically afford.

More home buying tips

How to start your house hunt
How to pick a great neighborhood
How the home buying process works