How much house can I afford?

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In a Nutshell

To understand how much house you can afford, you have to balance your income and expenses against the size of the monthly payment required to buy the house you have your eye on. The real estate industry, the Consumer Financial Protection Bureau and investment advisers all have formulas to help you.

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For many of us, buying a house is the largest purchase we’ll ever make. It may also be the most complicated.

There are a dizzying number of costs and fees, and an extensive set of criteria that are used to determine your eligibility. Plus loans come in all shapes and sizes. So answering the question “How much house can I afford?” can be tricky. Don’t worry … we’re here to help.

One straightforward way to figure out what you can afford is to meet with a mortgage loan officer or broker. They’ll look at your financial situation and use documentation, credit history and your input to help you determine the size and type of loan you can qualify for, and a range for the interest rate you might get. Once you have all that figured out, you’ll have a pretty clear picture of how much house you can afford.

But if you’d rather get a sense of this before meeting with a lender, read on.

Easy ways to answer ‘How much house can I afford?’

There are at least two formulas you can use to get a rough estimate of how much you can reasonably spend on a house.

Investing-giant Fidelity suggests saving up for a home until you have the equivalent of your annual household income, after which you may be able to afford a house for about four times that amount. But if more than 20% of your monthly income already goes toward debt payments, Fidelity recommends sticking to homes that are three times your income. If you’re debt-free, the investing firm suggests that you might be able to afford a home that’s five times your income.

Another formula for figuring out how much house you can afford, according to real estate website Zillow, is the 28/36 rule. This means your house payment, including homeowners insurance and property taxes, shouldn’t be more than 28% of your pretax income. And your total amount of debt, including the mortgage, shouldn’t exceed 36% of your pretax income.

Keep in mind that when lenders are determining your eligibility for a mortgage, they’ll look at your debt-to-income ratio, which, as the name suggests, helps them compare how much income you make to how much debt you currently have. They divide your monthly debt payments by your gross monthly income — your pay before taxes and other withholdings — and use that ratio to help determine if you can handle a mortgage payment.

According to the Consumer Financial Protection Bureau, the higher the debt-to-income ratio, the more likely it is that the borrower will have trouble repaying the loan. The highest ratio most lenders will accept for a qualified mortgage is 43%, the CFPB says. But, according to Fidelity, lenders prefer a DTI ratio of 36% to 42%. If your debt-to-income ratio is higher, you may need to make efforts to lower your debt — or increase your income — before you try to qualify for a mortgage.

Learn more: Understanding your debt-to-income ratio

Note that you shouldn’t just look at how much house you can afford to pay for each month — you should figure out how much you can comfortably afford. You have to decide whether you prefer a more expensive home, or more flexibility in your monthly budget. It’s up to you to decide how much wiggle room you need in your budget, and not buy a house at the very maximum of what you can afford if you want some money left to spend on other priorities like travel or saving.

More-in-depth considerations

Using these formulas is a great way to roughly estimate how much house you can afford, but determining the exact dollar amount is a little more complicated. It’s important to keep in mind that when you’re taking out a mortgage, you have to budget for a lot more than just your monthly housing payment.

Here are the other costs you need to factor in (a lender can help you with specifics for this).

  • Closing costs: These fees typically add up to 2% to 5% of the home’s purchase price, though they can rise to 7% or more. They’re due when you close on the loan and often include items like the home inspection, appraisal, title search and a loan-origination fee.
  • Down payment: Depending on the type of loan you get, you typically need to put down anywhere from 3% to 20% of the home purchase price upfront.
  • Ongoing costs of owning a home: You’re not just repaying the loan with interest every month. You’re also paying property taxes, homeowners insurance and possibly homeowners association fees, which all add to your monthly housing payment. If you got a conventional loan and put down less than 20%, or if you took out an FHA loan, you likely have to pay monthly mortgage insurance too.
  • Move-in costs/renovations: Will you have to buy all new appliances and furniture when you move in? Does the kitchen or bathroom need to be renovated? Need a new water heater? Factor in these costs, and remember that homeownership also requires ongoing maintenance and repairs.
  • Don’t forget your current personal monthly expenses: These could include things like the following:
    • Childcare
    • Utilities
    • Transportation
    • Food
    • Entertainment

An even more complicated way to determine how much house you can afford

The CFPB has a detailed formula to help determine how much you can afford for a monthly housing payment (see their worksheets, pages 4 and 5). They recommend you start by researching and listing out estimates of monthly costs for your ideal home. Estimates should include the following:

  • The loan’s principal and interest payment
  • Mortgage insurance
  • Property taxes
  • Homeowners insurance
  • Homeowners association or condo fees, if any

The total of those figures is your estimated monthly housing payment. The CFPB then recommends determining the percentage of your monthly income that this estimated payment would represent. To get this, take your estimated housing payment and divide it by your monthly pretax income. Multiply the result by 100 to get the percentage of your income that would go toward housing (the CFPB recommends that number should be 28% or less).

Lastly, the CFPB recommends subtracting your total monthly obligations from your monthly income to figure out how much money you’d have left over at the end of the month for other expenses. First, add up the estimated housing payment you calculated earlier, any car payments, student loan payments, credit card payments, and any other payments such as child or spousal support. Then subtract that figure from your after-tax income.

The remaining figure is what you have left for childcare, food, utilities, health insurance, entertainment, savings and any other expenses. Is it enough? It’s up to you to decide.

To figure that out, look at your financial records — bank statements, credit card records, and receipts from grocery stores, movies, restaurants, etc. — over the previous three months to get a sense of your average monthly spending. Then compare that with the number you got by subtracting your monthly obligations from your income to see if it covers a typical month’s expenses.

Is it enough to live comfortably? If so, then you know what you can afford on a monthly housing payment. But if the number doesn’t cover your average monthly spending beyond obligations (your mortgage payment, car payment, childcare, etc.), you should consider a less expensive house.

Once you’ve done these calculations and feel ready to take the next step, you can begin discussing with a lender what type of loan you may qualify for and at what interest rate. Together, you can come up with a more-specific dollar amount for how much house you can afford.