Buying a home can be a complicated process. From selling your home and finding a new home to hiring a realtor and applying for a mortgage, there’s a lot to do before you can finally close the deal on your new house.


One of the most important factors you need to consider is how much money you should borrow to buy your new home. Borrowing too much money can lead to unaffordable mortgage payments. Borrowing too little can prevent you from being able to purchase the home of your dreams, even if it is in your budget.


While the general rule of thumb is that your mortgage payments should be no more than 28% of your income, the true answer depends on your specific needs and circumstances.


Let’s take a look at a few things you should consider to determine how much you should borrow when buying your next home.



Determine Your Budget


First and foremost, you need to establish your budget before entering the housing market. Not only is it important to set your budget, but it’s important to stick to your budget no matter what.


It can be tempting to entertain listings that are a little bit outside of your budget, but this can lead to taking out a mortgage that you can’t really afford. So, when taking out your mortgage, be sure not to borrow more than is within your budget.



How Much Debt do You Have?


While 28% of your monthly income may be a good rule of thumb, it doesn’t apply to everyone. If you have excessive debt, be it from student loans, credit cards, or other sources, you may need to borrow less.


Just because you can qualify for a large mortgage doesn’t mean you should borrow that much. It’s important to consider the debt payments you are currently making in order to ensure that you retain some financial flexibility after taking out a mortgage.



How Big is Your Savings?


Depending on how much money you have saved for a down payment, you may not need to borrow as much money. Not only will a down payment reduce your monthly mortgage payments, but, if your down payment is at least 20% of your new home, you can avoid paying for private mortgage insurance.


Additionally, if you are able to make a large down payment, you’ll likely qualify for better loan terms as you’ll be viewed by lenders as a trustworthy borrower.



Reconsider Your Needs


Before applying for a mortgage, you should consider how much you should actually spend on your new home. While you may already have determined your budget, you shouldn’t necessarily only be shopping for homes at the high end of that budget.


Consider what your actual needs are, how much space you need, where your ideal location is, and other similar factors. You may be able to find a suitable home for a much lower price than you originally planned to spend. You should only ever borrow as much as you actually need, not necessarily as much as you can afford.


By taking these factors into consideration you can determine how much you need to borrow in order to buy the perfect new home.