How much
home you can
afford?
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As
you know from the basics
page you just read, to buy a home you need both
up-front money as well as the ability to make
monthly mortgage payments. You therefore
might be tempted to ask, "How much will I need in
order to make the monthly payments?" But actually
we'll approach this question from the other
direction: We'll find  out
the most expensive house you can buy given your
income and savings. This is called how much home
you can afford. You won't necessarily buy the
most expensive home you can afford, but you still
want to know what your upper limit is. You don't
want to waste your time looking at homes you can't
afford, and you also don't want to pass up homes
you thought you couldn't afford but which
might actually be within your reach.
Here's the super-quick rule of thumb:
Most people can afford a home that costs
up to three times their annual household income, if
they can make a 20% down payment and have only a
moderate amount of other debt. If you have little
to no debt and can put 20% down you can probably
buy a house worth up to four times your annual
income.1
Examples: If you make $57,200 a year
(which was the median
household income for first-time homebuyers in
2006) and have money for a down payment saved, you
can probably buy a $171,600 home if you have
moderate debt (debt payments of <12% of your
income), and a $229,000 home if you have little or
no debt. But of course, this is just a quick rule
of thumb and you'll want to get a more accurate
figure. The rest of this page will help you with
that. Also, if you're income is small but you're
sure you can make the mortgage payments and you
have excellent credits there may be other options
for you, which we'll get to later.
The first concept for figuring how much home
you can afford is pretty simple. Since you pay
for your house with a combination of a down payment
and a bank loan, the total of both is the cost of
the home:
Down Payment
+
Biggest Loan You Can Get
=
How Much Home You Can Afford
The down payment part of the equation is easy to
figure -- this is the total of your savings that
you're willing to put into your house. (We'll cover
down payments in more detail on the next page.) We
assume you have money for a down payment because if
you don't then you probably can't afford any
home, since it's hard to get a loan with 0% down.
You usually need a bare minimum of 3% of the
purchase price down, more typically 10% or
more.
The amount you can get from a lender is a little
trickier since it's based on many factors. Here's a
calculator that will help you with that.
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Here's what's important
about the values in the table above
- Putting 20% or more down opens lots of
doors. When you can make a down payment this
big you're almost certain to qualify for
some kind of loan. The bank will be
willing to loan more money than otherwise, and
you won't have to pay for private
mortgage insurance (PMI), which in turn
helps you afford even more home.
- Debt holds you back. The more debt
you already have the less home you can buy.
Decreasing your debt allows you to afford a more
expensive home, everything else being equal.
There's more on this on our pages about the
Debt Ratio and
How much loan can you
get?
- Buying a duplex or a house with a garage
apartment increases your buying power. When
you get a home with a unit you can rent out, you
can count the rent you'll receive as income.
This can allow you to buy a substantially more
expensive home than otherwise -- which will be a
much better investment. Your net monthly
payments could actually wind up being cheaper,
too, once you subtract the rent you'll
receive.
- 30-year loans vs. 15-year loans. The
advantages of a 30-year loan are that the
monthly payments are lower, and with a 30-year
mortgage you can qualify for a much larger loan
and buy a much larger (or nicer) house. The
downside is that you have to make payments for
an extra 15 years vs. a 15-year loan, and you'll
pay a lot more total interest over the life of
the loan.Still, in most cases you'll go with a
30-year loan. We'll cover the differences
between these later, but if you can't wait then
read about 15 vs. 30-year
loans.
- We've left out one important thing --
closing costs. You'll need to either pay the
closing costs from your savings (lowering the
amount you have available for a down payment),
or qualify for a loan that's a little larger
than the house you want to buy, and have the
closing costs added to the loan (which is called
"rolling the closing costs" into the
mortgage).
How much do homes
cost?
Now that you have an idea of how
much home you can afford, how do you find out
whether that's enough? That is, are there
homes to be had for the amount you can afford?
We'll cover that later (in the start
looking section), but here are two quick
pieces of advice.
First, don't get sticker shock by looking
at the pictures ads of homes for sale in the
newspaper, or in those real estate magazines,
because it's the more expensive homes that
get advertised. Cheaper houses definitely exist,
it's just not cost-effective for realtors to buy
big ads for cheap houses.
Second, you can get an idea of the
cost of homes in a given neighborhood at
Zillow.com.
Ignore the national median figure of $225,000
in 2006. Homes could be way less or way more
than that depending on where you live and the
size & condition of the home you want to
buy.
Figuring your monthly
payment
Figuring the max you can afford is all
fine and good, but once you have a specific home
in mind you'll want to know what your payments
will be on that home. We have a
separate page on figuring your monthly
payment in more detail, but here's a quick
table to give you a rough idea. A general rule
of thumb is that your monthly payment will be
between 0.75% to 1.15% of the purchase
price.
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Estimated
Monthly Payment based on Home
Price
for
5/10/20% down on a 30-year loan •
includes est. taxes & insurance
see the
calculator
to figure your situation
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$100,000
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$150,000
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$200,000
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$250,000
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$275,000
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$300,000
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6.00%
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800 / 745 / 646
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1199 / 1118 / 969
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1600 / 1490 / 1292
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1999 / 1863 / 1616
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2199 / 2050 / 1777
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2400 / 2236 / 1938
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6.33%
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820 / 765 / 663
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1230 / 1147 / 995
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1640 / 1530 / 1326
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2050 / 1912 / 1659
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2255 / 2103 / 1824
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2460 / 2294 / 1990
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6.67%
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841 / 785 / 681
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1262 / 1177 / 1022
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1682 / 1570 / 1362
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2103 / 1962 / 1703
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2313 / 2158 / 1874
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2524 / 2354 / 2044
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7.00%
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862 / 805 / 699
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1293 / 1207 / 1048
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1724 / 1610 / 1398
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2155 / 2011 / 1747
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2371 / 2213 / 1922
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2586 / 2414 / 2096
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7.33%
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883 / 825 / 717
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1325 / 1237 / 1075
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1766 / 1650 / 1434
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2208 / 2062 / 1792
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2429 / 2268 / 1971
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2650 / 2474 / 2150
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7.67%
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905 / 845 / 735
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1358 / 1268 / 1103
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1810 / 1690 / 1470
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2263 / 2114 / 1838
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2490 / 2325 / 2022
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2716 / 2536 / 2206
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Next lesson: Learning
about Down Payments
Now that you have a rough idea of
how much home you can afford we'll learn more
about down payments on the next
page.
(If you prefer to get a more details
about the numbers in the calculator before
moving on, check out our page on How
much loan can I get?.)
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Related Resources
References
1. Quick rule of thumb for estimating how much
home you can afford: Nolo
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