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Curbed University: How Much House Can You Really Afford?

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Curbed University delivers insider tips and non-boring advice on how to buy, sell, or rent a house or apartment. Additional questions welcomed to

There are two answers that matter to the question of how much house you can afford: yours, and your lender's. Your lender will make their determination through the pre-approval, which is a good place to start once you've decided to begin house-hunting in earnest.

The Pre-Approval Process
Most sellers, including all REO and short sale sellers, will not review an offer without a loan pre-approval, and many real estate brokerages require pre-approval in order to work with you. You can get a quick pre-approval from your regular bank or credit union if you're not sure which lender or mortgage plan you'll be using. But if you do know your specific lender and mortgage, go with the in-depth. With either process, you'll need to fill out a loan application and submit it along with the documents and information listed below.

Don't Go Changin'
Let's assume your application passes muster, and you've been pre-approved--congratulations! Don't go too crazy celebrating though: If you make major changes to your credit, debt, or assets after pre-approval, but before you secure a loan, you could jeopardize your chances of getting any mortgage at all. Lenders commonly re-check your credit within five days of your home purchase closing, and any significant changes to your score may put the kibosh on your loan.

How Much Per Month?
The two pieces to consider when deciding how much your're comfortable spending on a house are how much you can put down and what monthly payments you can handle. Standard loans generally require you to put 20 percent of the purchase price down, though FHA loans (that is, loans backed by the Federal Housing Authority) require as little as 3.5 percent. But of course the less you put down, the more you have to pay the bank each month, with interest. The easiest way to figure your monthly payments is to use a handy dandy mortgage calculator. Play with the numbers until you come up with a monthly payment that you can responsibly meet, and that will tell you what the upper limit of your purchase price should be.

There are a bunch of different mortgage calculators out there, but make sure to use one that includes not just your down payment and mortgage rate, but homeowner's insurance, mortgage insurance (if you put more than 20 percent down you can leave that one out), and property tax. Property tax rates vary by city, but the LA County average is 1.66 percent of the assessed value of the house. You're better off figuring out the tax rate yourself than taking the MLS's word for it--if the house hasn't been on the market in years, the stated rate could be off by thousands of dollars.

Start Shopping
When looking at houses that fit your budget, remember that the final price does not start and end with the asking price. Inventory is low right now and a bidding war can quickly drive up a price way above what you can comfortably pay. Also remember that the house you fall for may only be affordable because it needs some work. Is it still affordable when you add that into the mix? [Illustration by Eric Lebofsky]
· Curbed University [Curbed LA]