First, you don't want to look at houses you can't afford. This will give you unrealistic expectations about the type of home you want to live in and will make homes that actually fall in your price range look less appealing. It's better to start looking at the bottom of your price range or even below your price range and work your way up. That way, you'll really appreciate what say, $300,000 can get you that $250,000 can't.

Second, you want to do your own math because the bank may say you can afford more house than you would actually be comfortable paying for. While the bank will ask for very detailed financial information when you apply for a mortgage, it will not know the amounts of quite a few costs that eat away at your disposable income, like what your monthly grocery expenses are, how much you spend on gas, what your health insurance premium is, if you're diabetic and have high ongoing medical costs, what your water bill is and how much you spend on entertainment.

What the bank will know about are your monthly debt payments (like cards and student loans), the four major components of your home payment (property, interest, taxes and insurance) and any amounts you are legally obligated to pay (like child support). You want to make sure you don't borrow more than you can actually afford based on the bank's partial picture of your financial situation.

Here's How

The following steps will break down what may seem like a daunting process so that you can easily figure out how much you can afford to spend per month on your home.

  1. Figure out your household's take-home pay after tax.
    What do you and any other income-earners who will be contributing to the household bills bring home each month after tax? Look at your last pay stub, ask your HR department or use an online paycheck calculator to get this amount. This is how much money you currently have to spend each month. The good news is that this amount will actually increase your homeowner tax breaks. 
  2. Make a list of your household's recurring monthly expenses.
    This should include bills you pay every month, like the electric bill, and bills you only pay some months, like car insurance. If you don't already have a budget here you've been keeping track of these expenses, look at your checkbook, bank statements and credit card statements to help you figure out what you've been spending. Note which expenses are necessary (like the electric bill), which are totally optional (like going out to eat for fun and buying new clothes for fashion's sake) and which are necessary but flexible (like your phone and grocery bills).

  3. Figure out what expenses will go away.
    For example, if you're paying renters insurance, you'll be able to cancel that. If you're planning to cut back on certain fun activities (like going out to eat or an adult education class that isn't related to your career) in order to free up more funds for the house, note these as well. If you're moving closer to work, your gas costs will go down.

  4. Determine how much you have left after expenses to spend on housing.
    Once you know what you take home and what you spend each month (excluding your current rent payment), determine how much you have left over each month to spend on housing. When you make this calculation, don't forget to leave room to save for emergencies, retirement and whatever else you want to have money saved up for. In other words, count savings as a non-negotiable "expense." content courtesy: Investopedia 

                                                                    MORTGAGE CALCULATION   *