How much house can I afford?

John W. Schoen Senior Producer • Profile • E-mail

Mary is moving from the Big Apple to a place where the median home price will buy you more than a broom closet. As a first-time buyer, she's trying to figure out just how much house she can afford?

My partner and I will be moving to a more affordable market soon. We'll be looking to save up to buy a home in that market eventually, but we're not sure how much to save. If you're a first-time homeowner, how much can we expect to get in a mortgage, and how much should we be prepared to put down for the down payment?
Mary W., New York, N.Y.

This question really has two very different answers: 1) how much will a lender give you? and, more importantly, 2) how much do you feel comfortable borrowing?

Especially for first-timers, you really need to start with question #2, and no one can answer it better than you can. If you’ve never made a budget, sit down and come up with one. How much cash do you think you can comfortably afford to devote each month to housing (mortgage) payments? Some people are willing to forego movies and dinner out, bring lunch to work every day and give up their car – anything to own a home. Some stretch too far and find themselves pouring all their income into the house, leaving themselves in permanent financial stress.

Once you’ve got that monthly cash flow number, go to one of the mortgage calculators on the Web (we like www.bankrate.com) and play around with different scenarios. Try 20 percent down and see how much house your monthly payment will get you. You may be able to qualify for just 10 percent down; a lot depends on your credit and income. (Avoid “interest only” mortgages -- you don’t save much money and you’ll never build up equity; it’s like paying rent to the bank.)

Armed with a good feel for how much you think you can afford, shop around for a few mortgage lenders and ask them how much they’d lend you. (This should be free.)  You may be surprised to learn that the lender’s idea of what you can afford is a lot more than you came up with in your original exercise.

The formula they use includes some risk on their part that you’ll end up a little over your head. They’re willing to take a little risk because the bigger the loan they sell you, the more they make. But you don’t need to take that risk. Only you can determine your own comfort level.

Tax evasion for dummies
I have paid about $1,800 in estimated taxes this year as I am an independent contractor. My boss has decided to close his business and says he won't give me a 1099 so I do not have to report the income he gave me. I don't know what to do since I've already paid the estimated taxes. Help!
James, Toledo, Ohio

Report the income. Here are two good reasons:

First reason: Failure to do so is a crime. Tax evasion is a felony that can land you a prison term of up to 5 years or a fine of up to $250,000, or both. For more on how it works, here’s a sampling of recent tax fraud convictions.

Second reason: Though the exact number is obviously very hard to pin down, hundreds of billions of dollars in legally owed taxes go unpaid every year, according to IRS estimates. Every one of those unpaid tax dollars has to be made up by someone else. So if you don’t pay, all of us play-by-the-rules types will have to pay more.

After you file your return and join the play-by-the-rules crowd, go back to your boss and tell him to pay his fair share too. Tell him we’re tired of paying more taxes than we should because of slouchers like him.

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