2 Super Quick Tricks to Decide How Much House You Can Afford

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KEY POINTS

  • Buying a house that is too expensive can cause long-term financial issues. 
  • You'll want to make sure you don't over-commit and risk foreclosure or compromise other financial goals.
  • These two tricks can help you decide exactly how much house you can buy.


Don't buy more house than you can comfortably afford.

Buying a house is a huge financial commitment and you can't afford to make a mistake. Unfortunately, many people end up making a big error -- they spend more on buying a property than they should.

Banks will sometimes let you qualify for a mortgage that's at the very top of your budget, which can compromise your ability to accomplish other financial goals. Rather than simply buying the most expensive house your financial institution will allow you to purchase, try one of these two simple techniques for figuring out how much you can actually afford to spend. 

1. Your house can cost 2.5 times your salary

If you want an easy way to set your maximum housing budget, you can simply take your annual salary and multiply it by 2.5. So, if you make $50,000 per year, it means you could afford to borrow $125,000. If you also made a 20% down payment, then you could afford to buy a house that cost around $150,000. 

While this is a conservative way to determine what you can afford, it's long been suggested by experts as a good approach to ensure you do not end up house poor. The big benefit of this option is that it gives you a quick way to estimate the total amount you should spend on a home, while many mortgage lenders focus on monthly payments alone as a method of determining affordability. 

While monthly payments obviously matter a lot, looking at the big picture of how much you'll end up borrowing can help you avoid falling into the trap of committing too much of your money overall to your home purchase instead of other things, like saving for retirement or college for your kids. 

2. Your monthly housing costs can add up to 25% of your gross monthly income

Another common approach to determining how much house you can afford is to consider what percentage of your gross monthly income will go toward your housing costs. 

Gross monthly income is total income from all sources before taxes. So if you make $50,000 per year, your gross monthly income would be around $4,167. You would want to make sure that your total housing costs did not exceed 25% of that amount, including your mortgage principal and interest payments, taxes, and homeowners insurance costs.

While this approach focuses on monthly payments, it ensures you are not allocating too much of your monthly money toward your house. If your payment is too high of a percentage of your income, you could risk being unable to pay your bills if you experience even a temporary setback that reduces your earnings or prevents you from working. You might also not have enough left over to save for other things. 

It's up to you to decide which of these two approaches will work best for your situation. If you don't want to borrow too much in general, then the first approach would be best, while if you're just focused on making sure your home's monthly payment is affordable as you're paying your loan back, then opt for the second option.

Our Research Expert

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