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How Much House Can You Afford?

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buy a homeRight now, there are a number of people interested in buying homes. This makes sense, since home prices are low, and it is possible to get a low mortgage rate. Once you decide to buy a home, though, you do need to figure out how much you can afford.

While it can be tempting to get the biggest house that a lender will help you buy, it is important to make sure that you are can comfortably make your mortgage payments. Give your situation a lot of thought, and then figure out works best for your comfort level.

Rules of Thumb

A common rule of thumb is to keep your mortgage payment to 30% of your monthly income, although some suggest that 25% of your net income is also a reasonable measure. If you want to make sure that you are really accounting for the costs of homeownership, it can be a good idea to estimate some of your costs, including:

  • Utilities
  • Property taxes
  • General maintenance
  • Possible repairs

Add up these costs, and remember to include them when evaluating mortgage payments. For many, it makes sense to apply the 30% rule of thumb to total household expenses. This provides a more comfortable financial position, and creates more room in your budget.

However, you can’t rely entirely on rules of thumb. You need to examine your own situation and decide what is going to work for you. A rule of thumb is a good place to start, but you should tweak it to fit your individual situation.

What You Can Afford — and What You are Comfortable With

Another consideration is the difference between what you can afford (or what the loan officer says you afford) and what you are financially comfortable with. When my husband and I were shopping for a house, we were approved for a much higher loan amount than we expected. And, technically speaking, we could “afford” the payments. However, we weren’t comfortable with spending so much on a house.

Getting a bigger house, just because you are approved for the loan, or because you think you can stretch just a little to make payments, might not be the best option for you. Look at your situation, including the security of your income. One of the reasons we opted for a home and a loan half the size we were approved for is due to my variable freelance income. Right now, our housing costs are about 1/5 of our income. This means that if something happens, we’ll be able to keep making mortgage payments. Other things to consider as you evaluate your financial situation include:

  • Size of your emergency fund
  • Income diversity
  • Which expenses you know you can cut
  • Amount of debt you have

These factors affect what you can truly afford in terms of a loan payment. If you aren’t sure about your income stability, or if you haven’t prepared for an emergency, stretching your budget to “afford” a home payment can lead to ruin in the event of a financial setback. One of the questions you have to ask yourself is whether or not you could afford your house payment in different scenarios. Only then can you get a better picture of what you can really afford.

(Photo: nikcname)

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13 Responses to “How Much House Can You Afford?”

  1. Miranda,
    Fantastic tips on home buying.

    I would also suggest people shopping for a home measure their debt-to-income ratio when they consider the costs you listed in the Rule of Thumb graf. I agree that these measures don’t account for what home buyers are comfortable with, but it’s always wise to keep the DTI ratio well below 50 percent.

  2. I’ve always heard that 2.5 to 3 times your gross annual salary is a good rough figure to start with.

  3. Great points. As we’ve seen in the past, people will always take free money. One of the reasons we’re in this mess.

    I like the 25-30% rule but if I followed that, living in San Diego, I would have to buy a trailer, haha. My total payments are about half of my monthly income, but I rent out two rooms and have a second source of income other than my day job.

    • NateUVM says:

      So, are you sure you are calculating correctly?

      Your income = “day job salary” + “second source” + rental income

      Your housing costs = housing costs listed above + mortgage – rental income (the portion your renters cover for you)

      Might get you back closer to the 25-30%…

      • My day job provides 90% of my income and I conservatively don’t include rental income in case I lose that. My total housing expenses are around $1900(mortgage, prop. tax, hoa, insurance, utilities) and I get $500 back from principal reduction and tax deduction. Charge 600 per room to rent out(2 rooms). So I’m at around $200/month :)

        That’s why buying a house right now rocks!

  4. If you need to borrow money, no better step than applying for a mortgage to see how much you qualify to borrow. Of course, that doesn’t mean you should use it all, you need to take into consideration your other costs, the condition of the home, etc. But at least you’ll have a number to work with.

  5. Shirley says:

    Since we no longer have a mortgage, we toyed with the idea of buying a home for a rental since prices are so low right now. This article and the reminder of considering utilities, property taxes, general maintenance and possible repairs, was clarification that the headaches could outweigh the gain. Thanks, Miranda!

  6. One of the numbers I consistently see people miss when calculating a house purchase, is that of a reserve fund. I’m talking about money set aside specifically to cover larger house repairs, like a new boiler, roofing replacements, plumbing/electrical upgrades, etc. When figuring out the numbers, a certain amount needs to be set aside monthly or yearly, separate from regular maintenance, in order to cover these 5/10/20 year expenses when they come up. A good home inspector should give you the lifespan of some of these larger projects for the home you’re looking at; base your reserve numbers on those, update them every so often, and you’ll be in much better shape.

  7. Karen says:

    As a Realtor, I’m seeing first-hand the number of short sales and foreclosures that are the unfortunate fall-out of people getting in over their heads with mortgages they really couldn’t afford. I’ve often mused at the lack of “margin” people allow for themselves these days. We extend ourselves 100%, financially,emotionally, and with our time. When something goes wrong, we have no margin at the edge of our page to absorb the overage.

    Having said that, there are times, however that someone might want to stretch themselves. I’m thinking of a young couple who had a modest home built, very much within their means. Both their jobs were steady and they both had potential for advancement. When we saw them 8 years later, they said they wished they would have stretched themselves because their growing family was bursting at the seams.

    The decision is very nuanced and takes a lot of consideration. The numbers, of course are important, but lifestyle and future plans are also important. I’m seeing a change in mindset, though. People are ready to be happy with less, not all wanting the biggest and best at a cost that they really can’t afford.

  8. Ebahim says:

    My need is 130, 000 usd to buy a home.

  9. Prof.Dr Raymond Ng says:

    Keep your monthly mortgage below 18% of monthly pay based on One Person’s Salary in a dual income family. Tighten your belt. Pay off in 5 to 7 years time regardless of what tax benefits you could enjoy by stretching.Live within 1000 sq ft. Watch your property tax assessment. Relocate if necessary – our States, Canada, Belize, Panama, Costa Rico, Chile or even Asia Pacific economies! Don’t tax your too much. Limit your total mortgage size below $150,000. Life is not about just serving mortgages. Good luck!

  10. DachsieLady says:

    Something I do not see mentioned here yet is that (property) taxes and insurance part of your payment (escrow) may go up very rapidly even if you have a fixed rate mortgage and the principle part of your payment remains the same. In a four-year period, each year my taxes and insurance went up from the previous year making my monthly payment go up over $100 each year. The payment at 4.5 years was 165 percent of what it was at the start of the mortgage.

    Also, we must ask what is the overall outlook for the economy. An honest answer for the USA economic outlook at this time is that things are looking very bad. I believe that we are expecting extreme inflation because of all the “quantitative easing” (money printed and put in to the economy). So no matter if you are expecting some increase in your dollar income, your dollars will buy less and less.


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