2018 Home Buying Guide: How Much House Can I Afford?
So, you’ve decided to buy a house… Congratulations! Home ownership can be very rewarding, and a home is a great investment as well. But the home buying process can be a bit intimidating and confusing, especially for first time home buyers. Questions like, “How much house can I afford?” and “How much space do I need?” and “What do all these terms relating to mortgages mean?” can be overwhelming.
Fortunately, we’re here to help make your life easier. In this article, we’ll explore everything related to figuring out how much house you can afford. This includes the basics of mortgages, one-time expenses, planning for the future, and more. Critically, at the end of this article, we’ll provide some simple guidelines and an easy-to-use worksheet to help you answer the question, “How much house can I afford?”
This guide is intended to provide prospective home buyers with basic information to consider with regards to how to afford a house. It’s not exclusively a first time home buying guide, and really applies to anyone. But, for those who have bought a home before, a lot of this will be information they already know quite well. Still, our aim is to make this guide as useful as possible for as many people as possible.
Specifically, the goal is to both educate and to provide practical, usable advice and tools. By the end of this guide, any potential home buyer should have the basic information needed to make some initial calculations and understand the range of potential monthly payments they can afford. There are other elements that can then be determined from that information, including overall mortgage size based on term, interest rate, etc. There are many online calculators for these types of things, and we will provide some links to free, user-friendly calculators later in this guide.
The Limitations of Calculators
There are also many calculators online that seek to answer the questions we’ve posed in this article, especially with regard to, “How much house can I qualify for?” or “How much house can I afford based on monthly payment?” While these calculators are mathematically sound, we feel they’re a bit limiting. They use a one-size fits all approach, and without taking into account a lot of the more subjective factors involved in the home buying process. Hopefully, our guide fills in some of these gaps. Also, we hope our methods can help you to more accurately and thoughtfully answer these important home buying questions.
We should point out, however, that calculators, our guide, and other online information is no substitute for professional financial planning, real estate services, or investment advice. In all cases, potential home buyers should review their financial situation and goals with a professional. This should be done prior to applying for a mortgage or making an offer on a house. With that said, let’s get started in answering our question, “How much house can I afford?”
Why “How Much House Can I Afford?” Is a Complex Question
Exactly how much house you can afford is a far more complex question than it seems. This is because a wide range of factors go into formulating an answer. In some ways, you need to predict the future as far as whether or not your income will remain stable, increase, or decrease. You need to have a specific location or geographic area in mind with regard to where you intend to purchase a home. Also, you need to have a sense of what any change to your monthly expenses might look like, aside from house-related payments. And that’s not even including things like understanding what the current mortgage interest rates are, what kind of mortgage(s) you might qualify for, and similar financial questions.
Of course, no one can predict the future. So, much of your decision-making has to be based on your current life circumstances. We’ll be sure to talk about hedging against uncertainty in a later section. In general, though, it’s important to understand that because of all the inputs into this question, there’s no easy, obvious answer. If we could simply tell you, “If you make X per year, you can afford Y total home cost.”, then we would. But, that’s not reliable or useful information. And, anyone who claims to the contrary should be considered with skepticism.
Making Things Clear
At the same time, this issue does not need to be so complex that it is too hard to understand. As we walk through each of the topics in this guide, keep in mind it’s all leading towards something. In the last few sections, we’ll bring everything together in an approachable, easy-to-understand and easy-to-use manner. For now, though, let’s dig into one of the first things you need to understand to answer this question, which is the variability in price vs. home size from area to area.
Factors Influencing Price vs. Size
One way to measure house affordability, without regard to personal income or situation, is in looking at home much house you can get for a given amount of money. This is usually expressed in terms of price per square foot in real estate parlance. Unsurprisingly, this varies wildly based on a number of factors. Some of these factors include:
- Region or geographic area. Large city suburbs tend to be more expensive than rural areas. Areas that are especially appealing tend to offer less house for your dollar than areas that are less appealing.
- Age of house. Usually, older houses cost less, so you can usually purchase more size for the same price. This is due to the fact that more things are likely to need service, renovation, or repair as compared to a house that is much younger.
- Property taxes. The rate of property taxes, and how they are calculated, varies from state to state and in some cases town to town. A 2,000 square foot home on ¼ acre of land might cost the owner $2,000 in property taxes annually in one jurisdiction, and $12,000 in another.
- Supply and demand. If an area has a much greater supply of homes than demand, you can get much more size for your money. If the opposite is true, expect to get less for your money.
Variable Geographic Pricing
For all of the above reasons, and other, less influential factors, the amount of square footage you can get for a set price is incredibly variable across the United States. Some areas have very affordable housing, while others are shockingly expensive. Below, we’ve highlighted just a few examples from various towns representing different regions and socioeconomic statuses. For this exercise, we compared houses for purchase, as close in age, land area, and features as possible. The intent is to have as near an “apples to apples” comparison on size as possible. The data has also been averaged across several listings to arrive at the reported numbers.
|Location (City, State)||$/sq. ft. Average|
|Aliso Viejo, CA||$412|
|Rapid City, SD||$128|
|San Antonio, TX||$111|
Bear in mind, however, that most people do not have a great deal of choice when looking to buy a home, in terms of geographic area. That is usually dictated by their place of employment or other circumstances. However, as you can see, there is quite a diverse range in terms of how much house you can get for your money in different areas.
How Much Space Do You Need?
Another important consideration in answering, “How much can I spend on a house?” is determining exactly how much space you need. While everyone is different and has different preferences, there are some fairly common suggestions here. Again, you have to look a bit to the future (if you intend to live in the house for several years or more) to gauge what your family size might be over time. Then, you can use this simple rule of thumb for how much space you need.
- Start with 800 square feet. Then, not counting yourself or a significant other/spouse, add 300 square feet for each additional adult or child who will be living in the home. This is your minimum square footage to be comfortable.
- Start with 800 square feet. Don’t count yourself. Add 200 square feet for a spouse or significant other. Then, add 400 square feet for each additional adult or child who will be living in the home. This is your mid-range square footage.
- Start with 1,000 square feet. Don’t count yourself. Add 500 square feet for a spouse or significant other, and 500 square feet for each additional adult or child who will be living in the home. This is your upper-end square footage.
Of course, if you have the financial means, you can buy any square footage you’d like. But then, you probably wouldn’t be reading a guide to determine, “How much house can I afford?” in the first place! This is just a guideline for what the vast majority of people of average means would consider small, medium, and large in MOST markets in the United States.
Before we go further, and start discussing mortgages and other details in furtherance of answering, “How much house can I afford?” we want to briefly outline our assumptions for the balance of this article. Everything we’re discussing here is based on the United States market, current as of summer 2018.
For the sake of this article applying to the broadest range of readers possible, we’re mostly assuming people already live in the US. We also assume they either own, rent, or live somewhere rent-free (such as with parents). Additionally, we assume potential home buyers receive an income within the range of average for the US. Put another way, we are not writing this for those who are independently wealthy and can afford to outright purchase a home well in excess of what most people would be able to afford, even with a mortgage. This is aimed at the average, working and middle-class reader in the US.
Likewise, all our data on the various cost or expense categories that one might incur, the standards of property taxes, real estate expenses, and other elements are based on typical US data current as of this writing. While the principles we base our advice on in this article can be applied to almost anywhere on Earth, the specifics of things like mortgage loan terms and rates, home size standards, and all cost benchmark data, for a start, will likely be quite different. And speaking of mortgages…
Most people are going to need to take out a mortgage loan in order to buy a house. So it’s important to understand the basics of mortgages – what the different terminology means, what the interest rates mean in terms of payments, etc. Indeed, a corollary to, “How much house can I afford?” is “How much house can I qualify for?” After all, you may think you can afford more than your mortgage lender does. But, in the end, it’s really their decision that counts. Consider this a brief crash course in mortgage basics!
When it comes to mortgages, there are a lot of different acronyms and jargon thrown around that can be quite confusing. This is especially since there’s no such course in school as “First Time Home Buying 101”. However, for a basic understanding of mortgages, there are really only a few terms and concepts that you absolutely have to know, which we’ve defined below.
- APR – Annual Percentage Rate, which is the interest rate on the loan plus certain fees and other elements. It translates into the cost, per year, of borrowing money.
- ARM – Adjustable Rate Mortgage, meaning the interest rate is not fixed, but adjustable based on a number of terms and factors. This is opposed to a fixed mortgage (the most common and traditional), wherein the interest rate remains the same over time regardless of market conditions or other changes.
- Down Payment – The amount of money paid up-front on the purchase price of a home. This is deducted from the total sale price, leaving the balance to be paid via a mortgage loan. Usually 20% is standard in the majority of cases, However, the mandatory absolute minimum under Federal Housing Administration loan rules is 3.5%.
- Fixed-Rate Mortgage – A mortgage where the interest rate remains the same over the life of the loan.
- Interest Rate – The actual rate of interest on the loan, and the term we’re most concerned with. This is because APR can vary based on things like points paid.
- Points – Another term for percentage, in this context usually meaning an up-front or fixed payment. For example, paying 2 points on a $100,000 loan would be paying 2% of the loan, or $2,000, up front. This is usually done in order to obtain a better interest rate. For that reason, these are sometimes called Discount Points.
- Term – The term of the loan is the length of time to pay it back. The most common is 30 years (360 months), meaning payments are spread out in 360 monthly installments.
In this article, we’re mostly focused on Fixed Rate Mortgages, the traditional type of mortgage. This type presents the lowest risk option for most home buyers. However, the principles apply equally well with ARMs or other mortgage products. The math and specific advice may be a bit different, that’s all.
How a Mortgage Works
A mortgage works like any other type of loan. Once approved, the amount you are approved for is available (in this case, paid to purchase a home). You then have to pay back that amount, plus interest, over the life of the loan. In the case of 30-year traditional fixed mortgages, that’s over the course of 360 monthly installment payments.
While not directly part of, “How much house can I afford?” it is important to understand how a mortgage works, and what goes into your monthly payments. This makes up a big part of your monthly expense for home ownership. Of course, it will figure prominently into our math later on.
A mortgage payment is generally made up of two parts – the principal and the interest. Because of the way interest is calculated and the principal is amortized over the life of the loan, interest makes up the majority of the monthly payment at the start of the loan. It becomes less and less of the payment as the outstanding balance decreases. The actual monthly payment cost to the consumer, though, remains the same each month.
Short Term vs. Long Term Cost of Mortgage
Something we’ll touch on in more detail in a later section is your ownership intent and future planning for your home. As we said before, it’s understandably hard to predict the future. However, when choosing a mortgage, it’s important to have a sense of whether or not you intend to live in the same house for a relatively short term (a few years) or a long term (decades). This is because the amount of interest you pay over the life of the loan can vary quite a bit depending on the loan term.
If you only are going to live somewhere for a few years, then being more concerned with keeping your monthly payments low is probably the best bet. In that case, a low-interest rate and a long loan term are the best bet. If you plan to eventually fully own the home, and stay in it for many, many years, then you probably want to try to minimize the amount of interest you are going to pay on the loan. Likewise, a shorter term may be the best bet, even if the rate is higher. We’ll illustrate this with some examples in the next section, after we briefly discuss interest rates.
Mortgage Interest Rates
The mortgage interest rate is the basic cost of borrowing the money from a lender. This is the same as the interest rate on any loan. These rates are set based on market rates and conditions, and several other factors. The actual rate available to you as an individual is usually dictated by a combination of market rate, personal credit score, down payment, income, and assets/collateral. For more information on your credit score, and how to improve it, check out our article The 10 Best Ways to Improve Your Credit Score.
Interest rates can be a bit misleading to the uninitiated, however. A rate of 4% on a mortgage of $100,000 does not mean you only have to pay $104,000 to fully payoff the loan. That would only be true if the term of the loan was one year. Also, you would somehow have to come up with $104,000 within 1 year of taking out the loan. That 4% is calculated on the outstanding balance, adjusted each payment. So, on a 30-year loan, assuming you stay in the home for 30 years and make all the payments, you will have repaid the $100,000 balance and paid $71,869.51 in interest, for a total of $171,869.51.
Now, let’s look at a few examples of mortgage loans, for the same amount of principal. We’ll use $200,000 for our example. However, each scenario will have a different interest rate and loan term (duration) combinations, in order to illustrate the costs, interest payments, and monthly payments, and how they differ.
Ultimately, for most home buyers, the monthly payment is going to be the main factor in answering the question, “How much house can I afford?” rather than the term or rate. After all, the best way to minimize how much you pay for a home overall, if you intend to stay for the long term, is to not have a mortgage at all, and buy the home outright. That’s just not a realistic possibility for the vast majority of people, however.
Typical Options and Examples
So let’s look at a typical set of mortgage options as examples. Note that this excludes down payments and other factors that relate to the overall purchase price of a home. We’re not quite answering, “How much house can I afford?” yet, just looking at the monthly payments on the mortgage loans themselves. We also illustrate equity, showing how much principal you would still owe if you moved after 5 years. This helps you better understand the advantages and disadvantages of some of the different combinations. All data is rounded to the nearest whole dollar amount for simplicity.
#1 Example – 10 Year Loans
|Term of Loan||10 Years||10 Years||10 Years|
|Total Interest Charge||$42,988||$37,326||$31,746|
|Total Spent @ 10 Yrs||$242,988||$237,326||$231,746|
|Principal Owed @ 5 Yrs||$108,291||$107,054||$105,814|
|Spent to Live There @ 5 Yrs||$121,500||$118,663||$115,873|
#2 Example – 15 Year Loans
|Term of Loan||15 Years||15 Years||15 Years|
|Total Interest Charge||$66,288||$57,358||$48,609|
|Total Spent @ 15 Yrs||$266,288||$257,358||$248,609|
|Principal Owed @ 5 Yrs||$145,126||$143,579||$142,012|
|Spent to Live There @ 5 Yrs||$88,740||$85,800||$82,860|
#3 Example – 20 Year Loans
|Term of Loan||20 Years||20 Years||20 Years|
|Total Interest Charge||$90,871||$78,381||$66,207|
|Total Spent @ 20 Yrs||$290,871||$278,381||$266,207|
|Principal Owed @ 5 Yrs||$163,182||$161,566||$159,910|
|Spent to Live There @ 5 Yrs||$72,720||$69,600||$66,540|
#4 Example – 30 Year Loans
|Term of Loan||30 Years||30 Years||30 Years|
|Total Interest Charge||$143,739||$123,312||$103,555|
|Total Spent @ 30 Yrs||$343,739||$323,312||$303,555|
|Principal Owed @ 5 Yrs||$180,543||$179,019||$177,414|
|Spent to Live There @ 5 Yrs||$57,300||$53,880||$50,580|
#5 Example – 40 Year Loans
|Term of Loan||40 Years||40 Years||40 Years|
|Total Interest Charge||$201,221||$171,895||$143,665|
|Total Spent @ 40 Yrs||$401,221||$371,895||$343,665|
|Principal Owed @ 5 Yrs||$188,575||$187,239||$185,787|
|Spent to Live There @ 5 Yrs||$50,160||$46,500||$42,960|
This demonstrates the fundamental truth behind mortgages. The shorter the term, the higher the monthly payment, but the less interest you pay overall. The longer the term, the smaller the monthly payment, but the more interest you pay overall. Likewise, the shorter the term, and lower the rate, the quicker you gain equity, and reduce your principal owed.
It’s also important to note that none of the above examples include additional home buying costs. Things like closing costs, origination fees, points, taxes/escrow impound accounts, or other expenses make up this category. We’ll touch on some of those in the next few sections.
Other Home Expense Categories
A mortgage is, of course, not the only home-related expense you will have when owning a home. Many other categories of expenses, specifically tied to your home ownership, will come into play (along with all your usual monthly expenses like food, utilities, etc.). For this section, we’ve outlined the major categories of other home expenses that should be considered. They must relate directly to owning the home to be included. Put another way, if you would have these same kinds of expenses if you merely rented the property, and all ownership and repair-related issues were not your responsibility, then they’re not included on this list.
All of these play a role in your total monthly home-related payments. Therefore they all are important to consider with regards to house affordability. We’ll get into the specifics a bit more in the final sections of this article, as we bring all of these topics together. These expense categories include:
- Property taxes, paid either directly or through an escrow/impound account with the mortgage company.
- Home owner’s association (HOA) fees, common in planned communities, condo/townhome complexes, and similar.
- Mortgage insurance, sometimes required, depending on the down payment, credit rating of the borrower, and other factors.
- Home owner’s insurance/fire insurance/flood insurance/earthquake insurance/etc.
- Home warranty coverage.
- Amortized allowance or budgeting for home repair and maintenance expenses.
Ownership Intent and Future Planning
Part of what you need to consider when looking to purchase a home is what your ownership intent is, and what your plans for the future are. If this is a short-term home, and you know that going in, you may very well choose different mortgage options, a different size, age of home, and other characteristics based on the fact that you do not intend to live there for a long time. By the same token, if you’re planning to live some place for a longer period of time, your choices may be very different.
Your future plans also matter. You might buy a place with some extra space you don’t currently need. You might be spending a bit more than you need to at the moment, if, for example, you and a spouse plan to have a child sometime in the next few years, while you’re living in that house. Trying to game out a few of these kinds of scenarios is important when deciding how much house you need. Likewise with how much house you can afford. Naturally, something like having a baby will drastically change your expenses, too. You will then find you have less money to spend on your monthly mortgage and home payments. So these are important considerations to at least give a little thought to when trying to figure out, “How much house can I afford?”
One-Time Home Buying Expenses
Many first time home buying guides stress something that first time home buyers are sometimes shocked about: the one-time home buying expenses, separate and apart from the purchase price. There are a number of fees and expenses related to buying a home that add to the overall home purchase price. Of course, we’re not talking about things like furnishing it, buying new appliances, etc. Here, we’re just including expenses related to purchasing the home itself. It’s important for home buyers to be aware of these expenses, and budget accordingly. They most definitely make up part of the equation of home affordability. Some key examples are listed below.
Examples of One-Time Expenses
- Closing Costs, or Settlement Costs, are the various fees and expenses incurred at the time of closing the deal on a home. These can include expenses in a number of categories, such as realtor fees, home inspection fees, deposit interest, loan origination fees, deed and title transfer fees, paperwork fees, notary fees, escrow agent fees, termite inspection and certification fees, home warranty expenses, insurability survey costs, pre-pay HOA and/or property taxes expenses, common area key fees (for condos and townhomes usually), and much more.
- While dependent on circumstances, if moving to an area far away, airline tickets, hotel stays, gas, driving mileage, meals, and other expenses will likely add to your total.
- Service fees may also be incurred through utility transfers, new account setups fees, changing locks and having new keys duplicated, and similar.
- Finally, moving expenses themselves can also be considered part of a home purchase in many ways, including packing, transport, and unloading of your possessions from your existing residence to your new one.
How Much Can These Expenses Cost?
A good “How much house can I afford?” rule of thumb in most regions is to budget 4% of the list price of a home as additional closing cost expenses. Add 1% more if you are moving from a distance that requires hotel stays and airline tickets during home hunting or moving. Then, add 1% more for moving expenses. So, for most people, around 5-6% above and beyond the purchase price, at a minimum, in one-time expenses related to purchasing a new home.
One positive of this, however, and also for mortgage interest, is the tax credits and tax deductions that can be made. Mortgage interest (up to a certain amount), and expenses related to buying a home, both offer generous tax advantages (mortgage interest on a recurring basis, home buying expenses and credits in the year the home is purchased). Tax credits to promote home buying are also often available, especially for first time home buyers. This will further reduce your income tax burden in the year in which a home is purchased. So, some of the expenses may be recouped the following spring as an income tax refund.
Existing Financial Health
Another consideration when trying to determine, “How much house can I afford?” is your current financial health. If you have a great deal of debt and interest payments, on things like existing credit cards, personal loans, etc., you are less able to take on additional debt. This means you are less likely to qualify for as large a mortgage loan. Consequently, you would have a lower spending threshold on the purchase price of a new home.
Financial health should also be a consideration when looking at home much you can afford in monthly payments for a home. This is true regardless of what level of mortgage loan you may qualify for. A lot of existing debt, and minimal savings, means you are less able to respond to changes in life circumstances. These can include events such as losing your job, serious illness, illness of a spouse or child, natural disaster, etc. You should therefore be more cautious in taking on significant additional debt. Large debt means you have less margin for reaction than someone in better financial health. Likewise, you should want to allow yourself to save more money each month, rather than use it all for mortgage payments and similar. Therefore, it is wise to aim for a slightly smaller and less expensive home purchase.
Build In Uncertainty Protection
Similar to the topic discussed above, you want to try to build in some uncertainty protection into your financial planning. Home buying is no different. This means, even if the answer to, “How much house can I afford?” right now is a certain dollar amount, that does not mean you should automatically try to spend that full dollar amount. Allowing yourself some protection in case life changes occur, or the housing market turns bad and your home loses value, or for other financial hardships, is just good planning and common sense.
For example, if you find you can spend up to $300k on a home, that doesn’t mean you HAVE to spend $300k. A $250k home might be a little bit smaller or not have one or two features of your $300k home. However, you’ll be thankful you spent less if the uncertain future delivers a hardship. Lower monthly payments, larger savings potential, and more flexibility are hard to put a price on.
Re-Evaluation When Life Changes Occur
The good news is that when life changes occur, your financial situation can improve dramatically. For example, if you purchased a home by yourself, when you were single, and later get married, and your significant other moves in to your home with you, your own financial burden for the home will likely decrease as you add their income to your own. This can be most beneficial, but also should not be used as an excuse or rationale to buy more home than you can afford.
On the other hand, if negative changes occur, you may need to re-evaluate your current mortgage situation and other bills. It may be time for some hard decisions. Fortunately, most mortgage lenders have government-sponsored as well as private programs to assist in the case of life hardship such as a layoff, serious illness, death in the family, illness of a loved one, permanent disability, and other life-changing events. But this is far easier to manage and work through if you’re not already stretched to your financial limit. So, again, we can’t stress enough, home affordability also requires a modicum of restraint and long-term planning for uncertainty. And then, periodic re-evaluation after the purchase, in order to ensure you are spending and saving wisely.
Bringing It All Together
So, what does all of this mean for home buyers? You’ll notice we still haven’t given a clear answer to, “How much house can I afford?” We will offer some simple guidelines and sample (completed and blank) worksheets in the next two sections, which can be used as rules of thumb. But the plain and simple fact is, ALL of the factors we’ve discussed in this article come into play in determining your own level of house affordability. Your income, your expenses, your savings, debt, and credit situations all matter. Your intended ownership period for the home, whether you plan to start a family, get married, have kids, or what, all plays into the calculations on both how much house you can afford, and how much you SHOULD spend.
The location where you purchase a home is going to dictate a lot about how much house you can afford. Likewise, the mortgage option you choose is going to play a big part in your monthly costs, long-term equity, and other factors. The myriad of additional one-time and ongoing costs related to home purchase and ownership also come into play.
The Whole Picture
Taken as a whole picture, it should be clear that there is no good, one-size-fits-all way to answer the question, “How much house can I afford?” That does not mean, however, that consumers should just guess or take a stab in the dark, or rely on basic calculators that really don’t account for all the individual factors involved. Rather, we can use what we’ve learned in this article! All of these factors lead to a few simple guidelines (which we’ll discuss in the next section) that can be used as points of estimation. The guidelines also contain basic principles to keep in mind when completing the worksheets (last section of this article). These are also useful when working with a realtor, applying for a mortgage, or shopping for homes, online or in person.
With some simple rules of thumb, guiding principles, and the simple, straightforward worksheets, you’ll be able to craft your own, personalized and accurate answer to, “How much house can I afford?”
Below is the most simplified approach to GROSSLY ESTIMATING, “How much house can I afford?” based on monthly payment. Again, this is a gross estimate. For more precise results, you should review and complete the worksheets in the next (and last) section.
Gross Estimate Based on Monthly Payment
Figure out your current take home pay. This is how much money you actually take home, after taxes and other withdrawals on your paycheck. It’s the actual amount that is deposited in your bank account or issued to you as a check. We’re finding your MTHP, or Monthly Take Home Pay.
- Weekly paid employees, multiply this amount by 4.33.
- Bi-weekly paid employees, multiply this amount by 2.16.
- Twice-monthly paid employees, multiply this amount by 2.00.
- Once monthly paid employees, this amount is your MTHP as-is.
Don’t Forget Your Spouse!
Additionally, if you have another person, such as a spouse or significant other, whose income will also go towards home expenses, calculate theirs the same way. Then, add the two (or more) numbers together to determine your final MTHP.
Follow the short worksheet chart below. The Result (Line 7) is the gross estimate of the MAXIMUM monthly payment you can afford. Note that this is ONLY for the mortgage and includes nothing else like taxes, HOA fees, etc.
|1||Start here||Set value||35|
|2||You have a car loan or lease||Subtract 4|
|3||You have a child or children||Subtract 3 for each|
|4||You have > 2x MTHP as debt||Subtract 3|
|5||Subtotal||Sum Lines 1 to 4|
|6||Multiplier||Divide Line 5 by 100|
|7||Result||Multiply Line 6 by MTHP||$|
The example below is completed for your convenience. It is based on an MTHP of $5,000, with a car loan, no children, and less debt than indicated on Line 4.
|1||Start here||Set value||35|
|2||You have a car loan or lease||Subtract 4||-4|
|3||You have a child or children||Subtract 3 for each||0|
|4||You have > 2x MTHP as debt||Subtract 3||0|
|5||Subtotal||Sum Lines 1 to 4||31|
|6||Multiplier||Divide Line 5 by 100||0.31|
|7||Result||Multiply Line 6 by MTHP||$1,550|
So, this individual could afford a $1,550 monthly payment. You can now take this amount and go play around with the numbers on a mortgage calculator. We recommend this excellent one from BankRate. Work the numbers until your monthly payment number is at or below the result amount from Line 7.
Or, for another gross estimate, you can do just one more calculation. Simply multiply the Line 7 number by 0.60, then by 360, and you’ll get a rough result of the total 30 year traditional mortgage loan that you can afford.
For far more precise and accurate ways of answering the, “How much house can I afford?” question, try the worksheet in our next section.
Before we get to the final worksheet and example, we wanted to re-state the guiding principles that you’ve hopefully learned in this article. Keeping these in mind when completing the final worksheet. Also, remember them when looking at homes, working with a realtor, or applying for a mortgage. These will help you to make the best and most accurate estimations of your finances. And, they allow you to get the house of your dreams without putting yourself in financial jeopardy.
Ten Principles for Home Buyers
- Always be conservative with your income estimates.
- Always assume your expenses will be higher than you think.
- Look at your whole financial picture.
- Don’t forget about all the little costs that aren’t part of a sale price on a home, both one-time and recurring, as they add up to be a lot.
- Just because you can afford a certain dollar limit, doesn’t mean you need to spend that much. In most cases, spending a bit less is wiser.
- Remember that the real estate market can be volatile. The thinner you stretch yourself financially, the more at risk you are for negative turns in the market.
- When in doubt about something, look it up and learn more.
- Try to think ahead and plan for the future, even without knowing what will happen.
- Double-check your calculations.
- A house is just a building. The people who live inside of it make it a home.
Worksheet and Example
The attached worksheet (PDF file) includes a blank worksheet. You can use this to calculate your own, personalized answer to, “How much house can I afford?” It also includes a sample, completed worksheet based on the assumptions listed in the file. This provides a far more accurate accounting of your income, expenses, and how much house you can afford. You can’t save the file on our server, or fill it out here. You must save it to your own system. So, there is no risk of any information being collected by LifeGuideBlog.
We hope you’ve learned a lot from this home buying guide. Best of luck with your home purchase!
For Further Reading…
This cheeky and informative guide to getting approved for your mortgage is one of the best books on the subject in recent memory. The author, Elysia Stobbe, has written it based on the current market. Many older books have not taken the lessons of the 2008 financial crash and housing market bubble into account, and are now a bit outdated. This one is different. It offers real-life advice from Ms. Stobbe, who has personally closed over $250m in mortgages in her career.
A great entry in the “…for Dummies” series of books, this guide offers everything you need to know when buying a home. It provides all the advice necessary including where to start, how to evaluate homes, improving your credit score, negotiating the best deal, and more. Like the above title, it too is recent. It was updated to the 6th edition in 2016, meaning all the information regarding the market and lending standards is up-to-date.
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