How much home can you afford?

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Last update: March 2016

As you know from the basics page, to buy a home you need both the down payment and the monthly payments. So you're probably wondering, "How much do I need to make the monthly payments?"  But we'll answer 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 (pre-tax).  If you have little to no debt and can put 20% down you can probably buy a house worth close to four times your annual income.

Example: If you and your spouse together make $60,000 a year (which was the median household income for first-time homebuyers in 2009), you can probably buy a $180,000 home if you have moderate debt (debt payments of <12% of your income), and a $240,000 home if you have little or no debt and can make a 20% down payment.

If you're single and make $35,000 a year, then you can probably afford only about a $105,000 home.  But you almost certainly can't buy a home that cheap.  Single people have a tough time buying homes unless they make an above-average salary.  Marriage allows a couple to combine their incomes to better afford a home.

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:

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.

Here's the takeaway from the calculator

• 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).  We'll cover closing costs later.
  
  
• More details.  If you'd like to learn more about how we figure how much home you can afford, see the How much loan can I get? page.  That explains the factors influencing how much the banks will lend you.
  
  

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 to buy a house?  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 real estate magazines, because those show the pricier homes.  Cheaper houses definitely exist, it's just not cost-effective for real estate agents 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 $184,000 in 2016.  Homes could be way less or way more than that depending on lots of factors, most importantly where you live.  For example, the median sales price in California was $450,000 in 2006, but only $59,000 in Kansas.  That's quite a difference. (source)

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Related Resources

• Home Prices: US + Individual Cities, from the National Associaton of Realtors
• Home Prices: State + Individual Cities
• Home Prices: Historical Prices (year by year)
• Historical Mortgage rates: Mortgage-X

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