How Much House You Can Afford?

Figure Out How Much House You Can Afford

The stock answer given to this question is if you rent and have cash for a down payment, you can purchase a home. But what if you don't rent? Then, here's the simplified version of what a lender would do with you.


Step One: (Annual Gross Income)

What is your gross taxable annual income from all sources? If two people are buying together, add your gross incomes together. Let's say they totalled $72,000


Step Two: (Monthly income x percent you want to spend)

Brokers and financial planners will recommend that you spend a maximum of 32% of your monthly income on household expenses. With a monthly gross income of $6,000 ($6,000 x .32 = $1,920)


Step Three: (Calculate your debt)

Add up your current monthly debt. This includes things like a car loans, insurance payment, school loans, credit cards payments, and any other personal debt you may have.  All of this added together gives you your total debt load. Just a guess, but let's say that these add up to $420 a month.


Step Four: (Amount you want to spend total debt)

Now, take that total debt and subtract it from the amount that you were willing to spend per month to get your maximum monthly payment. $1,920 - $420 = $1,500


Step Five: (Monthly payment x 12)

Multiply that house payment by 12 months, and you have $18,000 to spend each year.


Step Six: (Annual payment interest rate)

Divide this annual amount by an approx. interest rate (I'm using 6% which is a very high average, just for an example). So, $18,000 / .06 leaves you with $300,000 available for a mortgage!


Step Seven: (Mortgage + Down payment)

Now, take the amount that you have calculated that you can afford to have as a mortgage, add the amount of cash that you have on hand for a down payment, and you get your purchase price! So, using the current example: The mortgage was $300,000 plus you have $30,000 on hand for a down payment, then you can afford to purchase a home for $330,000.


Now, did that REALLY seem like algebra to you?

Although this quick and easy estimate has it's uses, you should work with a mortgage lender so that you know EXACTLY how much you can afford.