Analyzing your financial capacity
Before you start looking for a new home, you should conduct an analysis of your needs and an accurate evaluation of your financial capacity. You must establish a realistic budget that accounts for your lifestyle and your goals. The purpose of this exercise is to set a reasonable purchase price. This way, you can narrow down your search and avoid being tempted by real estate that is above your means.
The key element in this exercise is accuracy. Remember that a budget is only useful if it accounts for your overall needs and personal or family situation.
Estimating your maximum mortgage
A simple way to estimate the maximum mortgage you can get is to multiply your gross annual salary by two (see Table 1). Note that most mortgage lenders calculate this by multiplying the gross annual income by 2.5. However, it is more reasonable to multiply it by two to avoid overextending yourself on mortgage payments. You should consult your banker or financial planner to get more ac- curate information as to what you can afford. This process is called mortgage pre-approval.