How Much House Can I Actually Afford?

How much house can you actually afford? A solid rule of thumb: keep your total monthly housing payment at or below 28 percent of your gross monthly income. For most families, that lands the affordable purchase price around three to four times their yearly pay.

A lender will happily tell you the biggest loan they are willing to hand you. That number is not the same as what you can afford. The bank is protecting the bank. My job here is to help you protect you. Let me show you how to find the house payment that lets you sleep at night.

Start With the 28 Percent Rule

The old, boring, dependable rule is this: your total monthly housing cost should stay at or under 28 percent of your gross monthly income. Gross means before taxes come out.

Say your household brings in $84,000 a year. That is $7,000 a month gross. Take 28 percent of that and you get $1,960. So your target is to keep the whole housing payment, and I mean the whole thing, at or below $1,960 a month.

Notice I said the whole payment. That includes principal, interest, property taxes, and homeowners insurance. Lenders call this bundle PITI. A lot of first time buyers only think about principal and interest, then get blindsided when taxes and insurance add $500 a month.

Work Backward to a Purchase Price

Now let us turn that $1,960 into an actual home price. First carve out room for taxes and insurance. On a typical home, budget about $450 a month for those two combined. That leaves roughly $1,510 for principal and interest.

At a 7 percent interest rate on a 30 year loan, $1,510 a month supports a loan of about $227,000. Add a 10 percent down payment and you are shopping for homes around $252,000. Bump your down payment to 20 percent and you can reach closer to $284,000 while keeping the same comfortable payment.

See how the down payment does heavy lifting? Every extra dollar down is a dollar you are not paying interest on for the next 30 years.

Do Not Forget the 36 Percent Backstop

There is a second guardrail that matters just as much. Your total debt payments, housing plus car loans, student loans, and minimum credit card payments, should stay under 36 percent of gross income. Lenders call this your debt to income ratio.

Back to our $7,000 a month household. Thirty six percent of that is $2,520. If you already pay $400 on a car and $260 on student loans, that is $660 gone. Subtract it from $2,520 and you are left with $1,860 for housing, a bit under the 28 percent number. In that case your debts, not your income, are setting the ceiling. Pay those down and your housing budget grows.

Budget for the Costs After You Move In

Affording the payment is only half the picture. A house you can barely squeeze into leaves nothing for the things that break, and things always break.

Plan to spend about 1 percent of the home value each year on maintenance. On a $252,000 house, that is roughly $2,520 a year, or $210 a month you should be quietly setting aside. Furnaces, roofs, and water heaters do not care about your budget. Keep a separate cushion for them.

Also keep your emergency fund intact. Do not drain every dollar into the down payment and closing costs. Closing costs alone often run 2 to 5 percent of the price, so on a $252,000 home budget $5,000 to $12,600 on top of your down payment.

Bottom line: Take your gross monthly income, multiply by 0.28, and that is your all in housing payment target. For a household earning $84,000 a year, that is about $1,960 a month, which lands you near a $250,000 to $285,000 home depending on your down payment. Then check the 36 percent debt rule, and leave room for maintenance and emergencies. Buy the payment you can live with, not the loan the bank offers.

These are general guidelines, not personalized advice. Interest rates, property taxes, and loan terms vary widely by area, so plug in your own numbers before you make an offer.

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