Free Nolo's Essential Guide to Buying Your First Home by Ilona Bray, Alayna Schroeder, Marcia Stewart Page A

lenders look at to decide how much you can spend, it’s time to think about what you believe you can spend. The point is to avoid taking on so much debt that you lose sleep or have to give up sushi for ramen noodles.
    In fact, if you look closer at that debt-to-income ratio, you’ll realize that it has a built-in problem. It’s based on your gross income—the amount you theoretically make before your paycheck gets eaten by taxes and other withdrawals. Your mortgage payment could end up being at least half of what you actually take home. Depending on your lifestyle, spending that much on a house might sound either just fine or ridiculously impossible.
    The easiest way to understand your current spending and savings pattern is to do a budget worksheet. You can do this using either special budgeting software, a spreadsheet like Excel, or the good old-fashioned way, with a pencil and paper. List all your expenses, including food, entertainment, clothing, transportation and car-related expenses, health and dental care, child and pet care, student loans, and utilities. Hold onto your receipts, and if you use an ATM card or make electronic payments, look at your bank statement to see where it’s all going each month. Include automatic monthly withdrawals on your budget worksheet—for your DSL line, online DVD rentals, or gym membership. Of course, you can leave your current rent and any rental-related expenses out of your calculations.
     
    CHECK IT OUT
     
    These websites have free budget worksheets you can print and fill out, or budgeting software to purchase:
    • www.vertex42.com
    • www.planabudget.com
    • www.quicken.com .
     
    Next, compare your monthly expense total to your monthly net income—what comes home, not what you make before taxes and the rest. The difference between that take-home pay and your expenses is the amount of disposable income that you can use for new house-related expenses.
    From paperclip to house
     
    Kyle McDonald set himself a challenge: to trade his way from a red paperclip to a house. He succeeded by bartering on Craigslist, working his way up through a pen, a doorknob, and a camp stove. It took McDonald only 14 trades (one with actor Corbin Bernsen) and about one year to reach his goal of homeownership. (He’s now ready to trade the house, too.)
    Read his story at www.oneredpaperclip.com .
     
    Most people try to modify their spending habits if their disposable income isn’t enough to cover the PITI. Having all your expenses in front of you helps you decide where to make such cuts. It also prepares you to draw the line if a lender or mortgage broker encourages you to pay more than your true budget allows. Remember, the lender mainly cares that you can pay back the money you borrow—not that you do it while living the life you want. If Pilates classes or Friday happy hours are important to you, then stick by your own budget and plan.
     

Getting Creative: Tips for Overcoming Financial Roadblocks
     
    After running the numbers, you may feel that you can’t afford a decent house, or maybe any house. But no matter your financial woes, there are steps you can take to ease them, including:
    • Reduce your debt. This will free up cash for monthly house payments and reduce your debt-to-income ratio.
    • Make a new budget. Revise your monthly budget, keeping your homebuying goals in mind. If you have targets, you’re more likely to control your spending habits to meet them.
    • Reduce spending. You may be able to get a roommate until you’re ready to buy a place, apply an expected work bonus toward your fund, go back to basic cable, or shop more at thrift shops. Check out local freecycle groups ( www.freecycle.org ) for free items.
    • Consider different financing strategies. Check out low- or no-down payment loans or the variety of adjustable rate mortgages with low initial payments (covered in Chapter 6).
    • Borrow from a nontraditional source. Consider different and creative