On another post, I asked you if would you rent for a while and test the market. You indicated your currently paying only $400 plus utilities when the rent around you're area cost around $1000 average. This house is well within your budget. I think you can afford this. You can negotiate on the terms including the closing costs. This is a great home young couples just starting out. Even if you live by yourself, it is still affordable. I think this is no brainer....
I think the most important thing to remember is REGRET. Do you see yourself living in this house for at least 5 or 10 years. What is your expectation? This house might be cute now and affordable but does it fit your expectation. The moment you start thinking selling after 4 or 5 years as an investment return, well you might be dissapointed.
When we were looking to buy our starter home 5 years ago, the average price was around $220K in our area. We also knew we may have to start a family right away. So having at least 3 bedroom was a must and a extra office (den). It cost us $283K to buy. But we are still very happy in our decision. And now with 2 young kids running around our 1740sq still fits us nicely even with occassional family get together or parties once in a while.