Don't start looking for your new home just yet. Before you fall in love with a house, condo or co-op—or even a neighborhood—it's time for a reality check. A careful analysis of your personal finances will tell you what you can afford to spend. Knowing your price range will help you narrow the field of potential homes and avoid the disappointment that comes when you set your sights too high.

Unless you come into a generous inheritance or win the lottery, you will probably have to borrow money to finance your home. And while you may be endowed with dynamite looks and captivating charm, a lending institution will be interested only in how you look financially. So it's important to get a good idea of your net worth and disposable income.

Your net worth consists of your total assets (things you own: savings accounts, IRAs, 401(k)s, stocks and bonds, cars, home furnishings, etc.) minus your total liabilities (what you owe: credit card balances, car payments, other long-term loans, etc.).

A lender will also want to know about your current disposable income, so you’ll need to get a picture of your annual budget. Your annual disposable income is the total of your annual gross income (salary, dividends, interest) minus your total annual expenses (including, but not limited to, housing, utilities, food, clothing, entertainment).