How much house can I afford?

I'm in the market for my first home and I don't want to get into the kind of trouble people got in before the Great Recession. Thanks!


Lisa Foreman, Member

While I cannot give you an exact answer without knowing your existing disposable income, excluding things like your current rent (which will be no longer relevant if you buy a new house), there are some widely accepted guidelines that may be helpful to you. Most experts recommend a housing payment-to-income ratio of 28% and a total debt-to-income ratio of 36%. In other words, you should only spend 28% of your monthly income before taxes on housing and 36% of it on your total debt obligations. Using this rule of thumb, if you do not have any other debt (e.g. from credit cards and auto loans), then your housing costs can obviously increase up to 36% of your income.

If, for example, your annual income before taxes is $100,000, you can spend around $28,000 per year on housing, or $2,333 per month. Remember, housing costs don’t just refer to your monthly mortgage payment; they include things like property taxes, homeowner’s insurance, and homeowner’s association dues. Your best bet is therefore to check out the property taxes in your area as well as the average price of homeowner’s insurance/dues and subtract them from your monthly housing budget. Assuming that they combine to...

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Richard Dattilio, Member

Now that you're ready to make that big decision and start shopping for your new house, it's time to reflect on just how much house you can afford. While most financial institutions subscribe to the 28/36 rule as a standard to follow, the more general 30 percent guideline proves to be a good industry standard too.

   So what does the 28/36 rule mean? Simply put, your new home mortgage should not exceed 28 percent of your monthly net income. The 36 reflects all of your combined debt, which includes your new mortgage too. The 30 percent rule allows you to borrow a little bit more, yet does not include any of your other monthly debts.

So here's the break down. If you earn 2000.00 net each month, your total debt should not exceed 36 percent or 720.00 per month with your new mortgage included. This shows just how important it is to reduce your miscellaneous debt prior to applying for your new loan. This will enable you to afford your dream house that is priced just out of reach. A factor that also must be entered into this equation is the associated costs that go along with your new...

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Other ways to ask the same question:
  • – What home loan can I afford?
  • – How much mortgage can I afford?