How Much House Can You Afford? - Money Under 30
Shop for your new app德扑圈官方网址home the smart way! Learn how to calculate how much house you can afford before hitting that open house or applying for a mortgage.

Buying your first app德扑圈官方网址home is one of the most important and exciting financial milestones of your life. But before you hit the streets with a realtor, you need to have a good sense of a realistic budget. Just how much house can you afford? You can determine how much house you can afford by following three simple rules based on different percentages of your monthly income.

The rules of app德扑圈官方网址home affordability

Mortgage lenders use something called qualification ratios to determine how much they will lend to a borrower. Although each lender uses slightly different ratios, most are within the same range. Some lenders will lend a bit more, some a bit less. We have taken average qualification ratios to come up with our three rules of app德扑圈官方网址home affordability.

Your maximum mortgage payment (rule of 28)

The golden rule in determining how much app德扑圈官方网址home you can afford is that your monthly mortgage payment should not exceed 28 percent of your gross monthly income (your income before taxes are taken out). For example, if you and your spouse have a combined annual income of $80,000, your mortgage payment should not exceed $1,866.

Your maximum total housing payment (rule of 32)

The next rule stipulates that your total housing payments (including the mortgage, app德扑圈官方网址homeowner’s insurance, and private mortgage insurance [PMI], association fees, and property taxes) should not exceed 32 percent of your gross monthly income. That means, for the same couple, their total monthly housing payment cannot be more than $2,133 per month.

Your maximum monthly debt payments (rule of 40)

Finally, your total debt payments, including your housing payment, your auto loan or student loan payments, and minimum credit card payments should not exceed 40 percent of your gross monthly income. In the above example, the couple with $80k income could not have total monthly debt payments exceeding $2,667. If, say, they paid $500 per month in other debt (e.g. car payments, credit cards, or student loans), their monthly mortgage payment would be capped at $2,167.

This rule means that if you have a big car payment or a lot of credit card debt, you won’t be able to afford as much in mortgage payments. In many cases, banks won’t approve a mortgage until you reduce or eliminate some or all other debt.

How to calculate an affordable mortgage

Now that you have an idea of how much of a monthly mortgage payment you can afford, you’ll probably want to know how much house you can actually buy.

Although you cannot determine an exact budget until you know what interest rate you will pay, you can estimate your budget. Assuming an average six percent interest rate on a 30-year fixed-rate mortgage, your mortgage payments will be about $650 for every $100,000 borrowed. (Just trust me on that—the math is complicated.)

For the couple making $80,000 per year, the Rule of 28 limits their monthly mortgage payments to $1,866.

($1,866 / $650) x $100,000 = $290,000 (their maximum mortgage amount)

Ideally, you have a down payment of at least 10 percent, and up to 20 percent, of your future app德扑圈官方网址home’s purchase price. Add that amount to your maximum mortgage amount, and you have a good idea of the most you can spend on a app德扑圈官方网址home.

Note: If you put less than 20 percent down, your mortgage lender will required you to pay private mortgage insurance (PMI), which will increase your non-mortgage housing expenses and decrease how much house you can afford.

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David Weliver is the founder of Money Under 30. He's a cited ity on personal finance and the unique money issues he faced during his first two decades as an adult. He lives in Maine with his wife and two children.

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We invite readers to respond with questions or comments. Comments may be held for moderation and will be published according to our comment policy. Comments are the opinions of their s; they do not represent the views or opinions of Money Under 30. Comments have not been reviewed or approved by any advertiser, nor are they reviewed, approved, or endorsed by our partners. It is not our partner’s responsibility to ensure all posts or questions are answered.
ikomrad says:

I use a version of Dave Ramsey’s formula – mortgage, pmi, taxes, hoa fees should not be more then 25% take app德扑圈官方网址home income, and he also recommends a 15 year fixed rate loan with 20% down.

My version is the same except I allow a 30 year loan payed back at the 15 year rate unless income is interrupted/decreased. If your income is impaired by job loss or other event, you can pay less on your mortgage to prevent foreclosure while working on getting your income back up.

If you go 15 year fixed with no wiggle room, your house may be foreclosed on.

sm rezaul haque says:

I have no job in USA, but i am able to pay monthly mortgage payment. I can pay $30000
as down payment. Will I be get approved?

Marnel Garcon says:

Good afternoon,

It depends on a few factors. No job is definitely a big problem as most banks will want you to have some sort of income. However, there are hybrid loans that you may be able to qualify for.

Jake says:

Why does it always have to be a mortgage that you can afford? The really smart thing to do is to pack money away until you can purchase a house cash. Live cheap, save, and you’ll end up saving yourself ALOT of money!!!
As far as the actual buying experience, get a realtors license. I’m not sure about every state, but in my state it costs about 30 hours and $250. Now, I don’t know about you, but I’m a lot smarter then the majority of the realtors I’ve encountered, and it is offensive to me that I’m quite literally forced to use a realtor to buy a app德扑圈官方网址home. If you tried without a realtor you’d know that information and access are extremely limited. The realtors association controls the information and the access. All that aside, the monetary costs justify it alone.

Bchrono says:

“The really smart thing to do is to pack away money until you can purchase a house cash.” Interesting theory Jake, to bad it doesn’t work in the real world.
Where do you plan to stay for the decade you plan to save up for a house? In your “really smart” world is that living with mommy until you are 30 or renting? I know I’m not comfortable crashing with my fiancee at my parents house with the hopes of saving up over $100k for a house, I moved out when I was 19. Renting would be plain stupid; In Michigan the mortgage taxes and insurance for my house is cheaper than renting an apartment. The apartment would have basically 0 outdoor space, no garage, less than 1/4th the living space of my house, and one less bathroom than my house. On top of that every penny I would have paid in rent would be gone, a waste, I might as well have burned it. At least while I’m paying for the mortgage I’m getting some equity built up and will eventually own the app德扑圈官方网址home. There is also no penalty for paying off my mortgage early. This means any of that money that I would have been “saving for a house” while paying rent or living with mommy I can apply directly to my principal.

Jake says:

It isn’t a theory, it is a fact. It is smart to buy cash, not easy, not comfortable, smart.
Not that this is necessary, but say you do live with mommy until you’re 30. Thirty isn’t that old and once you move out you’re moving into a app德扑圈官方网址home that is actually yours. I never said it was practical for all situations, but it is the best thing you could do from a financial perspective.
In your argument, you make a few bad assumptions.
1) You neglected to mention the closing costs. The costs of both buying and selling a app德扑圈官方网址home will likely cost you $10-12K, in that 100K price range. Right there is 1-3 years of rent, depending on costs, roommates, and quality. (money wasted)
2) You assume that you’ll be building equity. That assumption can be dangerous. Tell that to the people who bought app德扑圈官方网址homes in the last 10-15 years, how much equity did they end up with? (money wasted)
3) By renting, you are also purchasing flexibility. It is a kind of insurance for the unknown. When you own a app德扑圈官方网址home with a mortgage, what happens if you lose your job and can no longer make your payments? What if you end up needing to move a few years after you purchase? All those closing costs, all those payments, could end up being for nothing.
4) Maintenance. A app德扑圈官方网址home you own you have to maintain. I’m not sure about you, but it has been my experience, that this cost is greatly underestimated and can easily add on average several hundred to the monthly costs (money wasted).

tfd says:

I have to agree with bchrono. You are using worst case scenario which creates fear and uncertainty. Owning is smarter than renting. It was the greedy people who wanted to keep up with the jones’ and the greedy lenders who didn’t say no which created this housing mess. So everyone should live with mom and dad til they have thousands in cash to buy a app德扑圈官方网址home? Absolutely not. Forge ahead and buy a app德扑圈官方网址home. Key word here is AFFORDABLE.

Jke says:

You sound like a real estate agent. Go advertise somewhere else. When it comes to finances, you should always look at things from a worst case scenario, with a little fear and uncertainty. A lot of things are AFFORDABLE, the question is at what cost? For me, the goal is to OWN the app德扑圈官方网址home, not pay for it my entire life. Which route gets me to that goal faster, buy now pay later? Or, save now buy later? Key words being: PATIENCE, SACRIFICE, MINIMALISM, MODESTY.

Nicki says:

I’ve got a few friends that live in the bigger cities mentioned earlier. The key was never to “stretch”. They rent apartments with roommates. That’s what a friend of mine has been doing for years. It keeps costs down and you’re never totally alone in a metropolis.

Dave Phone says:

Many financial “Experts” make this way too complicated, and simply confuse people. I like to keep it simple and old school, one weeks check from your work should pay for one months mortgage payment, taxes and insurance included, and two weeks checks should cover all your debts and food and utilities. Just remember, if you don’t get paid every week, there are 4.3 weeks in a month.

KB says:

Thanks Dave. Thats the best and easiest piece of advice I’ve ever heard. I will definately be giving this a go (with the intention that that 1 week each month is also for saving!)

Jake says:

That assumes that you’ll always be working. Or, will always be able to pay your debts. Is that really the advice you want to give? If you’re giving advice, why not say, buy only what you can afford without credit. How simple is that? No interest payments. We tend to just assume that in owning a app德扑圈官方网址home we need to take out a app德扑圈官方网址home loan. Why? That is actually counter-intuitive. In taking out a app德扑圈官方网址home loan, you don’t own the app德扑圈官方网址home at all. In fact, you trap yourself in dept. Save. Own!

Rachel says:

Afew years ago, buying a house was easy now days everything has changed, it don’t really matter if you have the money for the downpayment, the most important thing that banks are looking for is your credit score.

Gilbert AZ CPA says:

It is important for folks to try to follow these rules. It seems that NOT following them has led (in part) to the current housing mess we are in. Just make sure you can afford what you buy and you should be in good shape. Pushing your financial limits will just get you in trouble.

Jeff says:

“It’s because of all the people that live in the expensive metropolitan areas…”

States with highest foreclosure rates (January 2009): Nevada, California, Arizona, Florida, Oregon

Daniel says:

It’s because of all the people that live in the expensive metropolitan areas (New York, Boston, San Francisco, etc.) who have “stretched farther” to buy a house that we are in this current financial crisis. These people were barely able to make thier payments and then something happens (job loss, accident, rising interest rates on ARMS) and all of a sudden they cannot afford thier house. They get forclosed on and the entire country ends up in a mortgage crisis.

My advice, figure out a solid budget for at least half a year before planning to buy. Make sure you know exactly how much you can afford to pay each month still leaving room for savings. That’s what my fiance and I did. We bought a smaller house and are comfortable making the payments and still able to sock away quite a bit for savings and investments each month.

Jason says:

One issue is that in some very expensive metropolitan areas (New York, Boston, San Francisco, etc.) it may be necessary–and common–to stretch farther if you ever want to get in the game at all. In a lot of these places, it still makes sense to suck it up for a couple years and eat a lot of ramen, especially if you anticipate making more money down the road (like if you’re still in an entry level job, but have good career prospects). It can even be fun; invite your friends over to enjoy your new digs instead of spending the money out at bars!

This *is* what I did, though I don’t necessarily advocate it for everyone… but it certainly make sense for some.

Another figure to use is the pre-qualification that the mortgage companies will give. A quick rule of thumb from when I worked in real estate was that the average buyer with typical credit should be able to afford a loan equal to about four times their gross annual income. So for example, if you make $50,000 a year and you have $50,000 for a downpayment, your affordability calculation would be 50k*4=200k, plus $50k=$250k purchase price. However this tends towards the high side compared to the calculations you note above, so I like to do both of them and compare the difference to use as the “range” of what your affordability is in an expensive market.

I should note that in some *very* expensive markets, lenders sometimes allow a debt-to-income ratio of up to 65%! Yikes!

twenties money says:

There are so many rules to buying a house. I Think these are very valid points but the fundamental concept of purchasing a house should be a payment which you are comfortable making for 30 years. Taking into account your house will cost more than just the mortgage, you have garbage pick up, utilities, power, there is sooo much more.

If you do use one of these rules keep in mind just because the rule states you can handle an $1,800 payment does that mean you should? What if something happens and you lose wiggle room, that extra money you spent purchasing that third garage and 5th bedroom could really come in handy at that point.

I lucked out when buying my house, prices in Texas are low. I feel bad for my friends in New York where they can’t find much for $300,000. I’m not sure how people making 35-45k can afford to live up there.


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