Your search for a new house begins with planning at home. In today’s market, an affordable home is not so much decided by its sale price as it is by the financing which interprets that price into a monthly payment.

How much you can afford to buy depends on two factors: 1. How much you’re able invest in the down payment; and 2. How much you can afford for the monthly housing payment. These payments will include principal and interest on the mortgage loan, and property taxes and insurance (PITI)

Principal
The amount borrowed, or the part of the amount borrowed which remains unpaid (excluding interest).

Interest
The fee charged by a lender to a borrower for the use of borrowed money, usually expressed as an annual percentage of the principal; the rate is dependent upon the time value of money, the credit risk of the borrower, and the inflation rate.

Taxes
The local government where the home is located will assess your home and determine its real estate taxes. Most lenders will collect this as part of your monthly payment and then pay your local government on your behalf. This is commonly referred to as tax escrow.

Insurance
A promise of compensation for specific potential future losses in exchange for a periodic payment. Insurance is designed to protect the financial well-being of an individual, company or other entity in the case of unexpected loss. Some forms of insurance are required by law, while others are optional. Agreeing to the terms of an insurance policy creates a contract between the insured and the insurer. In exchange for payments from the insured (called premiums), the insurer agrees to pay the policy holder a sum of money upon the occurrence of a specific event. In most cases, the policy holder pays part of the loss (called the deductible), and the insurer pays the rest.

Sometimes for buyers, monthly housing costs may also include mortgage insurance, home-owners association dues, and condominium fees.

Down Payment Sources
There are sources of income, other than the profit from selling your house that may not be as obvious as others.

Home Equity Loan
Homeowners usually have substantial equity built up in their homes. Through a home equity loan, one would be able to offer a down payment on a home for their children. It is possible for parents to be required to issue a gift letter after offering down payment to confirm they don’t expect reimbursement. Ask your tax advisor for current information about sharing profit after the house is eventually sold.

Company Profit Sharing or Savings Plan
Look into the possibility of withdrawing or borrowing against what you have in your employer’s profit sharing or savings plan account.

Life Insurance
After you have built up a cash value on your life insurance policy, you may be able to borrow up to the amount saved and get a pleasing interest rate form the insurance company.

Stocks and Bonds
Using your portfolio as security, you may be able to secure a bank loan without selling your stocks and bonds.

The more money you put down as a deposit, the less money you need to borrow. Keep this in mind. You’re still going to need finances to setup you’re new house.

Pre-qualification vs. Pre-approval
You’re focus will become clear during your house hunt after you know you price range. How much money you qualify for will depend on a range of aspects including credit history, length of employment, and down payment amount.
Based on information you provide, your lender can give you an estimated amount of how much money you will be able to borrow before applying for a loan. This non-binding process is called pre-qualifying.
Your lender can also take detailed look at your financial and credit history (including a credit check) and commit to lending you a certain amount of money pending specific property details. The lender will then provide you with a letter stating how much mortgage you qualify for. This process is called pre-approval. With a pre-approval letter, you can:

Search for a home with the self-assurance of, aware exactly how much you can afford.

Show sellers you are serious about purchasing and that you can afford to make a purchase.

Learn of any and all qualification issues early in the home buying process.
Because a pre-approval takes a closer look at your background and includes a credit check, it holds more weight with sellers than pre-qualification.
Mortgage Insurance

If you get a conventional loan, depending on your loan program and down payment amount, you may be required to buy private mortgage insurance (PMI). If you default on the loan, private mortgage insurance protects the lender allowing the lender to approve a larger loan amount.

Mortgage insurance offers several payment options, including making an initial payment at closing or making monthly installments with the house payment. If you want, you may increase your interest rate and have the lender pay the insurance. Compare the benefits of the different plans with you lender to decide which one will be the best for your situation.