How much house can you afford without going broke?
If you’re a first-time homebuyer, you may not know how much you can really spend on your monthly mortgage payment, homeowners insurance, property taxes, utilities, etc.
And you also have to factor in your other monthly expenses, such as your credit card payments, auto financing, and student loans to get an accurate budget.
Failure to account for all these costs may turn you into someone who’s house rich and cash poor. Then you’ll be spending so much on homeownership you can’t do anything else with your money.
So before you fall in love with a home out of your price range, we’ll show you how to calculate what’s actually in your budget in this guide.
Why You Need To Calculate The Cost Of Homeownership — Even if You Hate Math
How do you know whether you can afford a million-dollar home or one in the $500k range?
You crunch the numbers.
While this process may seem overwhelming at first (trust us, it’s not!), it’s crucial to get these digits down before you sign on the dotted line.
If you skip this step, wing it, or simply use the same number you’re paying in rent to determine your monthly mortgage payments, you’re doing it wrong.
See, if you take on a bigger, more expensive house than you can afford, you won’t be able to keep up with the monthly expenses.
Several missed mortgage payments later and your beloved dream home could get foreclosed on.
So not only will you lose your home, but you’ll also lose your equity, or the mortgage payments you made up until that point.
You may also have trouble meeting your other financial obligations, such as paying off your credit cards, student loans, or auto financing.
A foreclosure and these continued missed payments will lower your credit score and cause major damage to your creditworthiness.
All it takes is a few simple steps to figure out what you can really afford and avoid this.
Then you can go house hunting with confidence instead of worry.
How to Calculate How Much House You Can Afford
There are three simple steps to calculating how much house you can afford to buy:
Step 1: Use the 28/36 Rule
Many financial experts recommend the 28/36 rule when it comes to figuring out your homeownership budget.
The 28/36 rule says:
- You shouldn’t spend more than 28% of your gross monthly income on housing costs.
- Your total debt should stay under 36% of your gross monthly income.
So write down your gross monthly income, or your salary before taxes and deductions are taken out.
To get the first number, multiply your gross monthly income by .28 (or 28%).
If you’re making $10,000 gross per month, for example, that looks like this: 10,000 x .28 = 2,800.
This means your total housing costs for your mortgage payment, taxes, HOA (homeowners association) fees, etc. should stay under $2,800/month.
However, you don’t want your monthly total debt (which includes your mortgage payment) to rise above 36% of your gross monthly income.
So to find the maximum you should spend on total debt each month, multiply your gross monthly income by .36 (or 36%).
Using this example, that would be 10,000 x .36 to get $3,600.
Knowing what you pay each month for your loans and other debts will help determine if you need to lower your monthly housing budget.
Let’s say your monthly debt payments equal $1,500/month.
When you subtract $1,500 from your total $3,600 budget, you’re left with $2,100.
So a mortgage of $2,000/month, plus your $1,500 in current debt payments, totals $3,500. This stays well under your housing cost and total debt limits ($2,800 and $3,600, respectively).
However, even though your monthly housing budget limit is $2,800, a mortgage at this price added to your current debt payments ($1,500) would push you over your $3,600 limit. It would total $4,300 in monthly expenses, much more than you can safely afford.
Keep these numbers handy because you’ll be experimenting with them in the next step.
Step 2: Don’t Forget to Factor In These Homeownership Costs
Your mortgage isn’t the only expense in your homeownership budget. There’s also estimated taxes, insurance, and HOA fees factored into that number.
Anytime you’re browsing MLS listings online, websites like Zillow and Realtor.com will include prices for these under the property’s details.
You’ll want to add up these expenses and then subtract them from the 28% figure you found earlier.
Let’s say you find a home with monthly fees like these:
- $400 for property taxes
- $250 for HOA fees
- $200 for insurance
This works out to $850 in total — before your mortgage payment.
So you’ll need to subtract these from your 28% figure to see if you can afford the mortgage payments.
Out of our $2,800 estimated housing budget, this leaves us with just $1,950 ($2,800 – $850) for the actual mortgage.
But there’s also another factor you must include in your calculations: the interest on your home loan.
Step 3: Use a Mortgage Calculator To Determine Interest Rates
The type of loan you choose (fixed versus variable) and the interest rate you’ll be paying on that loan both affect the total price of your home and how much you pay each month.
For this calculation, it’s easier to let a mortgage calculator do the heavy lifting.
Simply plug in different home values and interest rates to see your potential monthly payments.
After a few adjustments, you’ll be able to narrow down how much house you can afford, the best loan terms, and the maximum amount of interest you’re willing to pay.
How Much House Can You Afford? Calculate It Now
You just need to do a few basic calculations to figure out your monthly housing budget.
So take out a pen and paper and crunch the numbers listed in the first step to find out how much you can really afford to spend, considering your current debt.
With those numbers in hand, check out the mortgage calculator to fine-tune your maximum housing budget using different loan terms and interest rates.
This simple prep-work — which takes less than five minutes — will give you the confidence to shop for your dream home without the fear of going broke in a few years.