How much house can I afford? This is one of the questions that we those of us who don’t already have a home think about on a regular basis. And it’s a fair question. There are all kinds of people telling you to get the biggest house you can because it will go up in value, some others who tell you to find the most run down piece of crap on the street because it will be a good investment, and all kinds of people in between.
But there is some math to do when you are asking yourself “how much house can I afford?” Let me show you how to calculate how much house you can afford based on your income.
I want to do this for you because I want your home to be a blessing and not a curse. I want you to enjoy your home and not feel like you are trapped inside the payment of it.
There are two major calculations that you need to know when trying to find out how much house you want to buy.
So here we go.
(1) Payment Less Than 25% of Your Monthly Gross Income
This is the first and (possibly) most important calculation that you need to know.
Banks and mortgage companies will often approve you for much more than this amount. But in order to stay financially fit, you need to make sure that you do your best to not go crazy and get a house that is too expensive for where you are now in your career and income.
Yes your income will hopefully (and probably) go up over time, but you have to be able to make the payment comfortably now. You don’t want to purchase a house with the idea that your income will go up in a few years and then it doesn’t (or it takes a lot longer than you originally thought). You want to make sure that you can be comfortable with the house payment now.
So when asking yourself, “How much house can I afford?”, this is step one.
Here is how you calculate how much of a mortgage payment you can afford:
Annual Income / 12 Months = Monthly Income
Monthly Income * 0.25 = Maximum Mortgage Payment
Also, these calculations are based on your GROSS income, which means your income before taxes, retirement contributions, insurance, etc.
Here is a chart to give you an idea based on some various incomes, of the maximum mortgage payment you should take on:
| Annual Income | Monthly Income | Max Mortgage Payment |
| $40,000 | $3,333 | $833 |
| $60,000 | $5,000 | $1250 |
| $80,000 | $6,667 | $1,667 |
| $100,000 | $8,333 | $2,083 |
| $120,000 | $10,000 | $2,500 |
| $140,000 | $11,667 | $2,917 |
| $160,000 | $13,333 | $3,333 |
| $180,000 | $15,000 | $3,750 |
| $200,000 | $16,667 | $4,167 |
| $220,000 | $18,333 | $4,583 |
And it is also important to remember that this is your TOTAL maximum mortgage payment. Your payment will include principal, interest, taxes, insurance, and HOA dues (if you have an HOA).
(2) Total Debt Payments Less than 35% of Your Gross Monthly Income
This one can be difficult for some people, especially if you have a lot of student loans. But this one is really important regardless of whether you want to buy a house or not.
Having a manageable debt load (or no debt at all) is a really important thing for us to be responsible adults.
Yes, you can easily make the argument that there is a difference between good debt and bad debt. But you need to be able to make sure that your overall debt load does not become too cumbersome.
This is why I put the guideline of not having more than 35% of your total income going toward your debt payments.
Your debt payments will include:
- Mortgages
- Car loans
- Student loans
- Credit card payments (if you don’t have them paid off every month)
- Personal loans
- Etc.
The monthly payments for ALL of these debts should not add up to more than 35% of your total monthly gross income.
If they do, then stop everything and start aggressively paying them down. You don’t have to pay them all off completely if you don’t want to. But at least pay them down so you can fit within this guideline.
Here’s a couple examples of someone’s debt payments and if they fit within the guideline that I have set.
Michael makes $85,000 per year (gross income). He has the following debt payments each month:
- Car loan of $450/month
- Credit card payment of $115/month
- Student loans of $375/month
He is looking to buy his first house and finds a house where the payment would be $1,500/month.
His total debt payments are $450 + $115 + $375 +$1,500 = $2,440
His monthly gross income is $85,000 / 12 months = $7,083.
His total debt service ratio is $2,440 / $7,083 = 34.4%
Based on my guidelines he can afford this house (but just barely)
Oscar makes $60,000 per year. He has the following debt payments each month:
- Car loan: $350/month
- Student Loans of $250/month
- Credit card payment of $90/month
He is also looking to buy his first house and finds one where the payment would be $1,200/month.
His total debt payments are $350 + $250 + $90 + $1,200 = $1,890.
His Monthly gross income is $60,000 / 12 months = $5,000.
His total debt service ratio is $1,890 / $5,000 = 37.8%.
Based on my guidelines, he cannot afford this house. He either needs to pay off his car, pay off his student loans, pay off his credit card, find a cheaper house, or put more money down on this house to lower the payment.
Here is a chart to give you an idea of the maximum amount of debt payments that you should have when you purchase a house:
| Annual Income | Monthly Income | Max Mortgage Payment | Max Total Debt Payments |
| $40,000 | $3,333 | $833 | $1,167 |
| $60,000 | $5,000 | $1250 | $1,750 |
| $80,000 | $6,667 | $1,667 | $2,333 |
| $100,000 | $8,333 | $2,083 | $2,917 |
| $120,000 | $10,000 | $2,500 | $3,500 |
| $140,000 | $11,667 | $2,917 | $4,083 |
| $160,000 | $13,333 | $3,333 | $4,667 |
| $180,000 | $15,000 | $3,750 | $5,250 |
| $200,000 | $16,667 | $4,167 | $5,833 |
| $220,000 | $18,333 | $4,583 | $6,416 |
Final Thoughts
When you ask yourself how much house you can afford, it is really just the first step toward homeownership.
If you look at your situation and plug it into a calculator and see that you don’t fit within these guidelines, that’s okay!
It takes some time to get ready to buy a house. It’s a really big commitment when you buy a home.
This process took my wife and I about a year to get ready to start the process of getting a house. So if it takes you a little while, that is completely okay!
I just want for a house to be a blessing to you and not a curse. 🙂
You can do this!
I believe in you!
Until next time!
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