How much house can I afford?

To determine how much house you can afford you will need to take into account several things including your income, other debt you might have, as well as the amount you have available for a down payment.

It's also important that you factor in all the costs of a mortgage. This means considering not only the principal of the loan, but also interest, taxes and insurance.

This calculator can help you determine your potential mortgage payment, and that will allow you to figure out exactly how much house you can afford.

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 $333 per month, you can afford to pay $2,000 per month ($24k per year) toward your mortgage.

With both this number and the down payment you can afford to make in mind, you’ll be able to easily determine the mortgage and total price of a house you can afford. One additional constraint to take into consideration is savings. No one wants to live paycheck to paycheck, so you should strive to save at least 10% of your monthly after-tax income after all of your expenses are accounted for.

As to the issues that befell so many homeowners during the Great Recession, they were largely due to people overextending themselves beyond the above guidelines, betting that home prices would appreciate. As long as you stick to the 36% and 10% guidelines mentioned above, you shouldn’t have anything to worry about because this basically ensures home loan affordability.

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 house. Property taxes, homeowner dues, and house insurance become real monthly debt that you will have to address. Don't forget unexpected maintenance costs with your new house that are sure to spring up too.

   This is a good time to reflect on how much savings you have and also it's a good idea to factor a savings percentage into this formula. You will need to have a savings account with at least enough to cover a few months' expenses in the event that you lose your job or become ill. Many experts advise saving 10 percent of your monthly income as a buffer to let you weather any storm that may come. Purchasing a home with little or no savings, coupled with pushing the envelope beyond the 30 percent rule is a sure way to fall into the abyss of foreclosure, so be prepared before you purchase.

Now that you know how much you qualify for why not contemplate on just how much house you really need to be happy. Exercising moderation and temperance regarding the amount you finance may help give you the peace of mind that comes with a smaller payment, along with the ability to pay off your home a bit early too.

Have fun shopping but just remember the rules!