Calculating the Down Payment

• 1). Total the funds that you're willing to spend from your cash and cash-equivalent accounts. Do not include cash from retirement accounts; although your plan sponsor may allow you to purchase a home using these funds, remember that the money is intended to be used in the future -- not now.
  
  
• 2). Subtract the amount of your down payment, holding some back for closing costs. Plan for a 20-percent down payment. Although FHA-sponsored loans permit a down payment as low as 3 percent, you may be forced to pay private mortgage insurance (PMI) under 20 percent, which is insurance that benefits the lender in case you default.
  
  
• 3). Estimate what you'll need to close the loan. This can easily total several thousand dollars. You'll need to pay for taxes, days of interest, your attorney, title search and insurance, property insurance and broker and lender fees. You'll receive a good-faith estimate of these charges from your lender. You may have some unknowns, like property insurance and taxes; use an estimate based on homes in your price range.
  
  

Calculating Your Payment

• 1). Calculate your pre-tax annual income and divide by 12. This is your monthly income.
  
  
• 2). Calculate 29 percent of the figure from Section 2, Step 1. This is your maximum allowable housing expenditure, including taxes, insurance, principal and interest.
  
  
• 3). Add together your remaining debts. Auto loans, student loans and the minimum payments on your credit cards all count. The total from Section 2, Step 2 plus this additional debt cannot exceed 37 percent of your gross monthly income. If it does, you must reduce your maximum allowable housing payment until the total does not exceed 37 percent.
  
  
• 4). Calculate your mortgage loan amount. Enter your revised maximum allowable housing total from Section 2, Step 3 into a free online calculator with estimated tax and interest rate information. Excellent credit earns the best interest rates.