Owning a home is part of many people’s financial dreams. But we often see the same question over and over again, which is “how much house can I afford?“
So we decided to include this one in our money shorts series that quickly answers the question for you.
So, How much House Can Your Afford?
This is a good question as it’s important to understand how much you can spend and should spend on your new home. You never want to overpay for a house and leave you with nothing left for expenses, entertainment, travel, etc.
While every financial situation is different, you will want to follow one simple rule and that is the 28/36 rule.
What is the 28/36 Rule?
This simple rule gives you a guide to not pay more than 28% of your gross monthly income on your home and related expenses (think taxes and insurance, HOA, etc).
Overall, you shouldn’t spend more than 36% of your gross monthly income on your home expenses and all other debts, such as student loans, credit cards, car loans, etc.
Remember this is just a rule, not something that every bank follows, but they do come generally close to it. If you have good credit, then banks will often allow these limits to be higher.
House Affordability Example
OK, let’s show a simple example here for you.
Let’s say you earn $60,000 per year, which means your gross monthly income is $5,000.
To know how much you can spend on a house mortgage with taxes/insurance/HOA included, we just take $5,000 and multiply by 0.28 (which represents the 28% part of the 28/36 rule)
$5,000 x 0.28 = $1,400
So this means you should look for a home that would cost you around $1,400 or less per month.
The amount of house you can afford will vary based on the current interest rates, housing prices, etc, but using this rule at least gives you an idea of where you should start.
If you have a lot of debts you pay per month, then this will change the calculation.
Let’s say you have $750 per month in debt payments you make.
$1,400 + 750 = $2,150
This amount would put you above the 36% part of the rule. It would equal 43% of your gross monthly income, which is probably too high. That means you would need to drop the $1,400 to a lower amount to be safe.
In this case, take your monthly income, then subtract your debt payments.
$5,000 – $750 = $4,250
Then multiply that by 0.28 which would be:
$4,250 x 0.28 = $1,190
So this would meet the 28/36 rule and keep you in a safe spot with your overall housing affordability.
In the end, you need to make sure you are comfortable making the payments for everything you owe. Don’t overextend yourself just to get a bigger house. It won’t be worth it in the end.
If you are a regular saver who puts away money each month, just add that onto your monthly debt amounts as well to give you an even better picture. Treat your savings like a monthly bill so you don’t have to sacrifice that just for a bigger house.
So to answer the question of “How much house can I afford?“, the answer is it depends on the math.
Just do the math using the 28/36 rule and it will give you a good guide.