Buying a house is probably the largest investment you will ever make. But how much is too much when it comes to buying a dream home for your family? Deciding how much to spend is a decision that will affect your financial future for years to come. Your real estate agent can guide you by explaining extra expenses you may not anticipate, like mortgage insurance, closing costs and points. As an informed homebuyer you can purchase a house you want while staying within a realistic budget.

Location, Location

Your chosen location should be convenient to shopping and transportation options, and for families, schools are a priority. In Cape May, beautiful beaches, wonderful restaurants, proximity to watersports and a charming small town atmosphere are a big plus. You may find that your perfect community costs more than others, but it may be worth it. Choose a neighborhood and check out the surrounding areas. If the prices are out sight, check out an adjacent community that may offer similar benefits at a lower price.

Getting a Mortgage

Unless you are paying cash, your mortgage lender will have something to say about how much you can spend on a home. Your gross monthly income is an important factor, but it is by no means the only thing to consider. Your bank or other lending institution will look at your credit history, your savings, how much you are willing to use for a down payment and the type of mortgage you are seeking. Current interest rates also figure into how much of a mortgage the bank is willing to lend you.

Do the Math

Keeping the mortgage payments down to 28 to 33 percent of your monthly income is a typical rule of thumb. Coming up with a larger down payment can make a difference in the ratio the lending institution is willing to use. A person putting down a full 20 percent of the selling price might be qualified at a 33 percent housing expense to income ratio, where expenses are up to 33 percent of income. A buyer putting down only 5 percent may require a 28 percent ratio, where expenses are just 28 percent of income. Another factor that banks look at is the amount of debt you carry. Generally, your total debt, including mortgage payments, car payments, student loans, credit cards, child support and other expenses should not exceed 36 percent of your gross monthly income for a conventional loan. An FHA loan may be a little more lenient.

Getting Prequalified and Preapproved

Your real estate agent can prequalify you for a loan and give you an idea of how much you can afford to spend on a house. A prequalification is a useful estimate to guide you in selecting a home in the right price range. For a formal agreement from a lender, ask your agent for guidance in obtaining a preapproval. A preapproval is a formal process whereby the lender looks into your finances and agrees on a dollar figure for your mortgage before you buy a home. When you choose a home and make an offer, sellers will look favorably at a preapproval letter and the closing process is apt to move along faster.

Increasing your Buying Power

To come up with the substantial down payment required to buy a home, some lenders will allow you to use gift funds as long as you use your own funds as part of the down payment as well. First-time homebuyer or other loan programs may apply, and you may opt for an ARM (Adjustable Rate Mortgage) to keep the interest rates down initially to lower your monthly payment. Your agent can advise you about negotiating closing costs with the seller. Now that you have taken a realistic look at your finances, you are ready to look into a Cape May home that you can enjoy, and afford.