Finding Your Comfort Zone
Just because you fit all the guidelines to make the lenders happy doesn’t necessarily mean you can afford the home. Other factors need to be considered including your tax situation and your lifestyle. One way to assess how much payment you can manage is to calculate a rough cash-flow analysis.
First, you need to calculate your monthly income after taxes. Start by including everything: salary, commissions, interest and dividends. If your eBay hobby is generating extra cash, make sure you include that as well. We will call the total gross monthly income, or GMI.
Next, subtract any tax deductions, such as your monthly mortgage interest and property taxes, as well as any deferred retirement contributions. The remaining total is your taxable monthly income, or TMI.
Next, contact your accountant or tax preparer and find out what your tax and Social Security would be
on your TMI. This is your monthly income tax, or MIT.
Now we can begin the cash-flow analysis. Start again with your GMI and subtract all expenses, including the MIT and house payment. Remember to include insurance, utilities, car payments, day care, 401k contribution, etc. After you have subtracted all of your expenses, the remainder is your net disposable income. This is the amount of money you have left to save and live on after making all of your payments.
Kevin Daum is the author of the comprehensive, custom home guide Building Your Own Home For Dummies and What the Banks Won’t Tell You: How to Get the Most Out of Your Mortgage. As CEO of Stratford Financial, he has financed hundreds of dream homes. He can be reached at email@example.com.
This story ran longer and with more detail in the 2008 Log Homes Illustrated Annual Buyer’s Directory.