How Much House Can I Afford?

How to Calculate How Much House You Can Afford

If you want to dig a little deeper on how much house you can afford and get into more nitty-gritty details, I’ve got you covered. We’re going to go over all the numbers step by step. 

1. Figure out 25% of your take-home pay.

To calculate how much house you can afford, use the 25% guideline we talked about earlier: Never spend more than 25% of your monthly take-home pay (after taxes) on monthly mortgage payments. That includes your mortgage principal, interest, property taxes, home insurance, private mortgage insurance (PMI) and homeowners association (HOA) fees.

Just add up how much you (and your spouse, if you’re married) bring home each month and multiply that by 0.25. For example, here’s what that would look like with a household take-home pay of $7,000 a month: $7,000 × 0.25 = $1,750

Easy, right? Stick to that number and you’ll have plenty of room in your budget to tackle other financial goals, like investing for retirement or saving for your kid’s college.

2. Use our Mortgage Calculator to determine your home budget.

Now that you’ve calculated 25% of your take-home pay to figure out your maximum monthly payment, we need to translate that into the amount you can afford to spend on a house—and how much you should budget for a down payment. 

By the way, you should aim for a down payment of at least 20%. Not only does a bigger down payment mean smaller monthly payments and less debt, but putting 20% down means you won’t have to pay for PMI—potentially saving you hundreds every month. A 5–10% down payment is fine if you’re a first-time home buyer, but get ready for bigger monthly payments and PMI.

3. Calculate your closing costs.

A down payment isn’t the only cash you’ll need to save up to buy a home. There are also closing costs to consider. Things like . . .

• Appraisal fees
• Home inspections
• Loan origination fees
• Credit reports
• Attorney fees
• Home insurance
• Property taxes

On average, closing costs for buyers are about 3–4% of the purchase price of the home—and you need to be able to pay for them with cash. On top of those costs, it’s also possible that you’ll have to pay for your real estate agent’s services (for example, 3% of the home’s purchase price). To sweeten the deal, the seller might offer to cover part or even all of what it costs you to work with your agent. But don’t count on it. Before you commit to working with an agent, be sure to discuss what they charge so you know your maximum potential costs.

A good number to shoot for when saving for a house is 25% of the home’s sale price to cover your down payment, closing costs and moving expenses. But whatever you do, don’t let the closing costs keep you from making the biggest down payment possible. The bigger the down payment, the less you’ll owe on your mortgage!

4. Factor in homeownership costs.

Here’s the truth: Owning a home is expensive. Between repairs, upgrades and maintenance, those bills can add up. Bills such as . . .

• Increased utilities: On average, if you’re used to paying $100–150 on utilities as a renter in an apartment, you might need to bump up that budget closer to $600 a month as a homeowner.
• Maintenance and repairs: Most homeowners spend about $1,750 a year on home maintenance projects. This could include things like landscaping or routine services like pest control and HVAC tune-ups.
• Furnishings and upgrades: These can cost major bucks, so plan for them in your budget ahead of time if you’re going to want them when you move in. For example, the average cost to furnish a house is around $16,000. Meanwhile, a minor kitchen remodel can cost over $27,000.

That’s why you should save up an emergency fund worth 3–6 months of your typical expenses before you buy a house (in addition to paying off all your consumer debt). When you don’t have an emergency fund, any unexpected expense that pops up can become a crisis. But with an emergency fund, an unexpected expense becomes nothing more than an inconvenience. 

So, when you’re figuring out how much house you can afford, don’t forget to factor saving for emergencies into the equation. Source

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