how much can i afford for a house, Buying a new home is exciting, whether you’re a first-time buyer or an experienced homeowner who’s planning on upsizing or downsizing. As you start to drive neighborhoods and peruse listings, you may be wondering exactly what you can afford to pay for a home. Ask yourself the question: “How much house can I afford?” and take the time to thoroughly investigate the answer.
It’s important to know exactly how much house you can afford before you start the shopping process. Otherwise, you could find yourself roped into a home purchase that’s well out of your budget. By taking some time to calculate your budget, you can ensure you get the nicest house possible while avoiding going house rich, pocket poor.
How much house can I afford?
To understand how much house you can afford, you need to take into account two important factors — what lenders will approve you for and what fits within your budget. The good news is that these budgetary guidelines typically line up. Even so, you will need to make sure you don’t take on more house than you can afford just because the lender is willing to approve a loan for that amount.
Lenders look at a long list of criteria to determine the amount of house they’re willing to approve you for. The list includes things like your current monthly debt payments, your total debt, your income, your credit score, your current assets, how much of a down payment you can make and the current status of the economy.
The 5 Cs of lendingCredit history is your credit score and your past borrowing history can be found in your credit report. Capacity refers to what you can [afford](https://howtodiscuss.com/t/how-much-house-can-i-afford/10114/2). Often, this is a look at your debt-to-income ratio — how much you are paying in [debt](https://howtodiscuss.com/t/national-debt/9657) monthly versus how much income you are bringing in.
Collateral in a home purchase will be the physical home you are buying, which becomes collateral the bank or lender can seize when you don’t repay your loan. Capital deals with what other assets you might have to help with repayment of the loan, and conditions are the purpose of the loan, the market environment and the status of the economy.
The rule of 20A rule that may be somewhat antiquated — but is still widely cited as important — is the rule of 20. According to this rule, homebuyers should not purchase a home unless they are prepared to make a 20% down payment on top of the additional costs associated with purchasing the home. For example, if you are looking to buy a $300,000 home, under this rule, you should be prepared to make a down payment of $60,000.
The rule of 28/36With the rule of 28/36, prospective home buyers compare their gross income with their expected house payment and other debt responsibilities. Under this rule, no one should purchase a home where their housing expense would be more than 28% of their monthly gross income. As a reminder, gross income is the amount you make before taxes.
Note: the rule mentions housing expenses and not just your mortgage payment. This would include things like property taxes, homeowner’s insurance, homeowner’s association fees, and community development fees. It does not include things like utilities.
For example, if you bring home $5,000 in income a month before taxes, the total of your mortgage payment and other housing expenses outlined above should not be over $1,400.
The second half of this rule looks at your total debt responsibilities you’ll owe for the month, including the cost of the new purchase. The total amount of these monthly payments should not exceed 36% of your monthly gross income. This should include expenses like credit card bills, student loan payments, car payments and any other form of regular debt payment you are obligated to make.
How to calculate your home budget based on income
A popular way of answering the question, “How much mortgage can I afford?” is to look at it as a percentage of your income. This method is quite similar to the first half of the 28/36 rule, but it does not include additional housing expenses.
1. Add up your total monthly income
Add up all of your different sources of monthly income. This includes your paycheck, your significant other’s paycheck (if you have one and they contribute to your household, that is) and any side hustle money that you’re earning on a regular basis. Calculate this number without including taxes or other deductions taken from your check.
2. Multiply that number by 25%
Once you’ve calculated your total gross monthly income, multiply that number by 25% or 0.25.
3. Use this as a guideline when homes Shopping
The number you get from this calculation should be the maximum you spend on your monthly mortgage payment. It’s important to note, though, that this does not mean it’s the amount you must spend. It’s completely acceptable to spend under this amount.