Your house will likely be your biggest purchase, so figuring out how much you can afford is the one of the first major steps in the homebuying process. You have to start by crunching the numbers.
Maxing out your income to buy your dream house is a one-way ticket to financial trouble. It’s important to make sure you have enough room in your budget for emergencies and unexpected expenses, not to mention retirement savings.
To determine how much house you can afford, most financial advisers agree that people should spend no more than 28 percent of their gross monthly income on housing expenses and no more than 36 percent on total debt — that includes housing as well as things like student loans, car expenses, and credit card payments. The 28/36 percent rule is the tried-and-true home affordability rule that establishes a baseline for what you can afford to pay every month.
Example: To calculate how much 28 percent of your income is simply multiply 28 by your monthly income. If your monthly income is $6,000, then multiply that by 28. 6,000 x 28 = 168,000. Now, divide that total by 100. 168,000 ÷ 100 = 1,680.
Depending on where you live, your annual income could be more than enough to cover a mortgage or it could fall short. Knowing what you can afford can help you take financially sound next steps. The last thing you want to do is jump into a 30-year home loan that’s too expensive for your budget, even if you can find a lender willing to write the mortgage.