How to Avoid Overpaying for a House

Don’t bother shopping for a house before thoroughly reviewing your financial situation to see what you can afford. What is your monthly budget for housing? What is your debt-to-income ratio? How much cash do you have on hand for a down payment? The best deals are available to those who put down at least 20 percent. It must be lower than 43 percent to be approved for a mortgage, but the lower, the better. What is your credit score? For a traditional mortgage, it must be at least 620, but higher is better.

Lenders and other financial experts use a rule of 28/36 percent to help clients determine how much they can afford to spend on a house. No more than 28 percent of gross income should be spent on housing, and no more than 36 percent should go to total household debt. So if your income is $4,000 per month, your house payment (including taxes and insurance) should not exceed $1,120 per month, or 28 percent. Total household debt, including housing and other monthly obligations like credit cards and student loans, should not exceed 36 percent, or $1,440.