Home Buying Budget

How to Calculate How Much House You Can Afford?

A good rule of thumb is using the 28/36 rule, which is that you shouldn’t spend more than 28% of your gross, or pre-tax, monthly income on home-related costs and no more than 36% on total debts, including your mortgage, credit cards and other loans, like auto and student loans.

Example: If you earn $4000 a month and have $400 in existing debt payments, your monthly mortgage payment for your house shouldn’t exceed $1,040.

The 28/36 rule is a starting point for determining home affordability, but you’ll still want to take your entire financial situation into account when considering how much house you can afford.

What Factors Help Determine How Much House You Can Afford?’

Key factors in calculating affordability are:
1) your monthly income
2) cash reserves to cover your down payment and closing costs
3) your monthly expenses
4) your credit profile.

Income. Money that you receive on a regular basis, such as your salary or income from investments. Your income helps establish a baseline for what you can afford to pay every month.
Cash reserves. This is the amount of money you have available to make a down payment and cover closing costs. You can use your savings, investments or other sources.
Debt and expenses. Monthly obligations you may have, such as credit cards, car payments, student loans, groceries, utilities, insurance, etc.
Credit profile. Your credit score and the amount of debt you owe influence a lender’s view of you as a borrower. Those factors will help determine how much money you can borrow and the mortgage interest rate you’ll earn.