How Much House Can You Afford?

If you are thinking about buying a house, either for the first time or upgrading, it is a good idea to calculate how much of a mortgage payment can you afford. It’s best to calculate these numbers BEFORE you start looking for a house. Otherwise, you run the risk of clouding your judgment or wasting your time looking at houses you can’t afford. So, how do we calculate how much we can afford? It’s not a hard calculation but it does require you to be honest with yourself.

I got this step-by-step calculation out of Suze Orman’s The Road to Wealth, which I think is Suze’s best book. I’m not a big Suze Orman fan but some of the stuff she says makes a lot of sense.

STEP 1 – Figure Out Your Net Income

This is your income minus:

  • taxes
  • Social Security withholding
  • retirement contributions
  • and anything else that is taken directly out of your check

For this example, we’ll assume that your monthly NET income is $4,500.

STEP 2 – Add Up Your Monthly Payments on ALL Your Debt

These items can include the following:

  • student loans
  • car payments
  • credit card payments

NOTE: do not include your rent or current mortgage payment.

If this number is MORE THAN 30% of your net income (or $1,350 using the $4,500 from above), STOP! You have too much debt! Your first priority should be to pay down your current debts so that you can better afford a mortgage payment in the future. I think this is prudent advice.

STEP 3 – Add Up ALL Your Monthly Living Expenses

Be sure to include EVERYTHING (even items that are marked savings). Be honest with yourself. If it’s something you pay once a year, divide it by 12 to get the monthly amount.

NOTE: Again, do not include your rent or current mortgage payment.

Subtract your monthly expenses from your net income (found in STEP 1). What’s left over is the MAXIMUM amount that you can afford to spend on your mortgage payment (including property taxes, homeowner’s insurance, maintenance, PMI, and any other hidden costs that come with home ownership.)

Keep in mind that this formula does not include any tax benefits that might be available to you via income tax deductions. It would be beneficial for you to sit down with your tax consultant or your tax software and run the numbers to see what type of deductions you might be able to get. Any deductions will lower your monthly costs of homeownership.

Whatever you do, DO NOT rely on the mortgage lender/broker to tell you what you can or can’t afford. Trust me, most of them are not looking out for your best interest. They want to sell you a loan and make as much money as possible. Yes, there are some qualifications involved in getting a loan, but I know from experience that lenders will lend you more than you might be comfortable with.

What if you’re not ready for a mortgage payment? Don’t sweat it. Pay down your debts, save up some money, and have patience.

12 thoughts on “How Much House Can You Afford?”

  1. I’d consider this to be the maximum that you can afford on a house. For my wife and I since we’re both employed, we didn’t take our net income together, but based our purchasing power off of one income with the thought that we’d be able to make it off a single income if anything ever happened (and would allow us to consider in the future one of us being a stay at home parent).

  2. I’d add in that it’s not just what you see on the surface..


    That will add up to be more than your house payment. Especially in a new house. But there’s nothing better than owning your own beautiful home. I hope everyone gets to experience this at least once in their life.

    – Bryan

  3. JLP,

    Thanks for the formula. What would you suggest about our situation: even after we pay off our cc debt, our enormous student loan payment amounts to 20% of our monthly take home?

    My initial thought is to see how much home we could afford, then subtract the balance of the student loan. Thoughts?

  4. Him,

    I would try to figure out what you have left over after your student loan payment. Then, I would use that number to see how much of a house payment you can afford. Be sure to include your savings account as part of your bills otherwise it might get left out.

    Also, keep in mind that there is a hidden “savings account” with a mortgage since each payment represents some principal (although very small at the beginning).

    I think the main thing to take from all this is the fact that you don’t want to do anything that is going to cause you pain.

  5. I just posted about this from a completely different angle. Mostly, can you handle the responsibility of owning a home. That’s something that has to be part of the equation, though it’s not easily quantifiable like a paycheck is.

  6. Good guide. And you’re quite right that the bank will give you more than you can handle. Though you could technically handle it at the banks max tolerances, I wouldn’t advise it. Heres how banks compute your debt to income (DTI) ratio. This applies to most loans.

    Take your pre-tax and deduction monthly income. If a bank is verifying your income from direct deposit, they will typically count 160% of what gets direct deposited from employers. This is because they have to factor in taxes, health care, 401k, etc. If they are looking at a Social Security direct deposit they will count it 130%.

    Now take a look at all the active debts that you have on your credit report. This will include mortgages (first and secondary), credit cards, student loans, car loans, etc. Take whatever the bureau is reporting as the minimum monthly payment for each of those and add them all up. Now divide the minimum payment total by your monthly income. The percent you come up with is your current debt to income ratio. (This does not include things like utilities, groceries, child care, etc.)

    The next step to again take your monthly payment total and now add on whatever the new monthly payment for the loan will be. Now take that and again divide by your income. This is your adjusted debt to income.

    That is the number that banks are going to use to see if you are capable of paying back the loan. Banks are going to use different methods of deciding how much is an acceptable DTI of course depending on their risk tolerance among other factors. The bank I work for wants an adjusted DTI of 40% or less for new customers and 45% or less for customers with an existing relationship.

    In theory, its very much so workable but I imagine its cutting it way too close for many people.

    (P.S. The formula gets more complicated if you are consolidating other debts with the loan, so I’m leaving that out for this little guide. A lot of times a bank will look to consolidate other debt in order to allow you to afford the loan. This may be a great thing depending on your situation, but it might not be either. Just do your homework.)

  7. I’ve written about this a bit on my blog, since I bought my first house 10 months ago. I had no idea utitilies would be as much as they were- gas, electricity, water, sewer. Not to mention we had to overhaul the electrical wiring in the house right after I bought it. Consider those emergency repairs, landscape maintenance, etc. when buying! They sure add up.

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