Dear Heather,

How much home can I afford to buy? I am tired of renting, and I want to buy a house. My bank says I qualify to buy a home for $400,000, but I am worried if something breaks, I won’t be able to afford to fix it, plus make my mortgage payment. How can I make sure I won’t get in over my head?”

Potential Buyer

Dear Potential Buyer,

You appear to be an intelligent first-time homebuyer — a buyer who thinks ahead — and that’s good. It’s smart to consider affordability before signing that purchase contract and plunging into debt.

Debt ratios

First, look at your monthly gross income before levies and contributions. This is how much you make per month, not how much you take home. What you take home is net income. Divide your net income in half, and from this deduct any other loans or debts. The remaining balance is roughly what you can afford to pay per month on a mortgage. This is because most banks will not extend a loan-to-debt ratio of more than 50 per cent of your net income.

It is important to be preapproved before searching for a home. So meet with the bank of your choice to see what they might be prepared to offer you as a mortgage. You will need to fill out an application form and supply them with proof of salary and any additional income plus a government-issued photo ID. It can really help expedite the process if you have all the required documentation readily available.

Down payments

In Bermuda the banks are typically looking for a down payment of 20 per cent to 25 per cent or more of the purchase price. Also factor in the closing costs on a) securing a mortgage (finders’ fee and stamp duties) b) Stamp duties and legal fees on the conveyance and c) appraisal and property insurance.

Your Payment Comfort Level

Before you jump into home ownership, why not set aside the additional amount you would pay for a mortgage every month to see how you do? For example, if your rent is $1,000 and you plan to pay $1,600 for a mortgage payment, set aside $600 per month for three to six months.

In other words, pretend you are making a mortgage payment. If $1,600 a month doesn’t strap you for cash, you can probably afford to pay that much for a mortgage payment.

If you feel more comfortable borrowing less than the amount shown on your loan pre-approval letter, then do so. Don’t make the mistake of taking out a mortgage that will be a struggle for you to maintain. Do what feels right to you.

Your first home WILL NOT be your dream home; unfortunately that will have to wait! You probably don’t need to buy the most expensive home you are qualified to buy. Consider your first home a starter home and work first on building equity and security for yourself and your family.

• Heather Chilvers is among Coldwell Banker Bermuda Realty’s leading sales representatives. She has been working in real estate for 25 years. If you have a question for Heather, please contact her at hchilvers@brcl.bm or 332-1793. All questions will be treated in confidence. Read this article on Facebook: Ask Heather Real Estate