How Much House Can I Afford?

how much house can i afford

Whether you’re a first-time home buyer or have bought a home before, it never hurts to go over the basics of home buying and the tricks to figuring out how much house you can afford.

The house buying process can be daunting. There are a lot of things to consider when creating a budget for buying a home and figuring how much you can afford to spend on a house. But by using a few house payment equations you can easily figure out how much house you can afford.

Also be sure to take advantage of your local financial services so you can tackle the house-buying world and how it applies to you on an individual level.

Explore this Article:

How Much House Can I Afford Calculator
Step 1: Look at Your Credit Score
Step 2: Do Calculations and Budgeting
Step 3: Find Your Agent
Step 4: Start the Home Search
Step 5: Enter Your Contract and Close the Deal!
Key Home Buying Definitions

The process for buying a house is not going to be the same for everyone. We all have different financial situations, incomes, salaries, bills, debts, expenses, and spending behaviors. We even all have different desires, wants, needs, and hobbies that go into how we spend our income and will affect our buying options when looking for a home. All of these variables should be carefully weighed and considered as you embark on your home-buying journey.

Understanding Home Mortgages

When applying for a mortgage lenders will consider the four factors listed below when deciding the kind of mortgage and interest rate you can get:

  • Your income
  • Demands on your income, like debts, monthly bills, loans, and other expenses
  • Your credit history
  • Your credit score
Types of Mortgage Lenders

There are also five types of mortgage lenders and each one comes with its own pros and cons.

  • Federal government agency lenders
    • Federal Housing Administration (FHA)
    • US Department of Agriculture (USDA): These mortgages can be for homes in more rural areas. The USDA can also be used to rebuild and rehabilitate old properties that qualify.
    • Department of Veterans Affairs (VA): These mortgages are for veterans. You can even use them to make your home more accessible.
  • State government lenders
  • Nonprofit lenders
  • Local lenders, banks, and credit unions
  • Larger banks and lenders

How much house you can afford will also depend on what kind of house you buy. There are several types of homes and the bigger and better they are, the more they are going to cost. Here is a list of home types from cheapest to most expensive:

  1. Condo
  2. Mobile home
  3. Townhouse
  4. Duplex
  5. Single family home

guide to home buying

If you’ve never bought a home before, the process can seem daunting. To help you understand the home buying process, we’ve broken it up into 5 simple steps.

Step 1: Look at Your Credit Score

When starting the house hunt many people like to begin with the fun part by browsing for the perfect home on Zillow. But you should check your credit score before you start the house hunt. While looking at your credit score keep an eye out for the following:

  • See where your credit score is at—how good or bad it is.
  • Check your credit report for any errors and have them corrected.
    • Get on this now because if you need to correct your credit report, the changes will take some time, even months, to correct.
  • Look for ways you can better your credit score.
    • Figure out the reasons your credit score is lower than you want and develop plans to fix those issues or habits.
    • Paying down your general debt will also help your credit score.

Step 2: Do Calculations and Budgeting

The big question most people want to know when looking for a home is “how much house can I afford?” or even, “how much can I afford to buy a house?” Many of these same people want to find a “how much house can I afford” rule of thumb.

There are basically 3 rules of thumb for figuring out your own home buying budget. In general, a good rule of thumb is to spend 2.5 to 5 times your annual salary on a home. It is ultimately up to you where you decide to land in this range.

Method 1: How Much House Can I Afford Based on Savings?

how much house can i afford based on savings

When figuring out how much you can afford to spend on a house you’ll want to primarily focus on what you already have saved. Try to pay a down payment of at least 20%. In order to figure out the amount of house you can afford based on what you have saved for a down payment, use the following equation:

(amount you have saved up) divided by (0.20 or 20%) equals (how much house you can afford)

Method 2: How Much House Can I Afford Based on Income?

how much house can i afford based on income

If you want a quick estimate of the amount you can afford for a house, here is an easy calculation you can do based on your annual income:

(gross annual income) multiplied by (2.5) equals (how much house you can afford)

Example: 100k salary how much house can I afford?

As an example, if you make $100,000 a year than you will do the following calculations to figure out the total amount of house you can afford:

(100,000) multiplied by (2.5) equals (250,000). So someone who makes $100,000 a year can afford a $250,000 house. By simply multiplying your yearly income by 2.5 you can quickly answer the question, how much house can I afford based on income.

Method 3: How Much House Can I Afford Based on Monthly Payment?

how much house can i afford based on monthly payments

In order to find out how much in house payments you can afford use the 28/36 rule. The 28/36 rule is a recommendation that your budget has a front end ratio of 28% or less and a back end ratio of 36% or less.

Lenders will look at both these ratios to decide your mortgage loan. When budgeting for a home, you can use this ratio to see if you meet these requirements and to see how financially ready you are to buy a home.

Front-end (28) refers to your total housing payments to income ratio (PITI). Your total housing payments don’t just refer to the Principal. It also refers to the Interest, Taxes, and Insurance (hence, PITI).

This front-end ratio means you should not spend more than 28% of your monthly gross income on your total monthly mortgage payments.

Back-end (36) refers to your total debt to income ratio (DTI). This back-end ratio means you should not spend more than 36% of your monthly gross income on debts. Debts include credit card payments, child support, auto loans, student loans, and any other debts you may have.

If you have a debt to income ratio that’s higher than 36% then your housing payments will need to be even smaller than 28%.

How Much House Can I Afford Dave Ramsey?

I’m sure many of us would love to ask the question directly to the man himself, “How much house can I afford Dave Ramsey?” You might not be able to ask him directly, but Dave Ramsey does have advice to help you budget for buying a home.

  • Pay a down payment of 100% and in cash when you can.
  • Choose a 15-year mortgage over a 30-year mortgage.
  • Keep your mortgage payments (plus insurance and taxes) no more than 25% of your take-home pay (net income).

Unlike the 28/36 rule, Dave Ramsey advises that your front-end ratio be no more than 25%, instead of 28 percent. He also advises that you use this percentage on your net income, or take-home pay, rather than your gross income. This will better reflect the money actually going to your bank account after taxes.

The Mortgage:

Just because a lender qualifies you for a certain amount that does not mean you should use it all. The mortgage amount you qualify for is very different from how much mortgage you should use.

The maximum loan amount that your lender is willing to let you borrow, does not reflect your personal budget and what you actually want to be paying each month. This is why being able to do your own budgeting and calculations is important because then you can see and decide for yourself how much you are willing to borrow.

The Down Payment:

When preparing to buy a home, what you really want to be doing is preparing for the down payment. The higher a down payment you can afford the better.

Your down payment should be at least 20% of the total price of the house. But, you can find loans that accommodate lower down payments and mortgage rates if that’s what you require:

  • Fannie Mae, Freddie Mac, the Federal Housing Administration (FHA mortgage), the USDA, and the Department of Veterans Affairs are just a few options for low down payment mortgages.
Other Costs and Fees Associated with Buying a Home:
  • Closing costs and fees. Some examples of what may be included in the closing costs are appraisal fees, loan fees, attorney fees, and house inspection fees. Closing costs and fees will vary and depend on local tax laws and the cost of your home. If you want to estimate how much your closing costs might be, they generally range between 2 and 5% of the cost of your home.
  • Taxes, insurance, and HOA fees for certain neighborhoods.
  • Home maintenance, upgrades, and repairs: Homes need regular maintenance, remodeling, normal upkeep over the years, and repairs when emergencies and damages suddenly occur.
  • You’ll need to potentially buy appliances, furniture, and decorations.
  • You’ll be responsible for paying all your utilities, which can include, heat, electricity, water, sewage, trash removal, cable television, and telephone services.

Step 3: Find Your Agent

Buyer’s Agent

If you are looking to buy a house then you’ll want to find a buyer agent. A buyer’s agent is the rel estate agent you want to be working with directly as a buyer. They are an agent who serves the buyer (you) and will thus work to get you the best price you can get on your home.

Seller’s Agent

This is not who you want to be working with directly because they will be trying to get the best price for the seller. Though usually the buyer and seller agents will mediate offers and agreements and work alongside each other in that way.

Now it’s time for the fun part of buying a home—the zillow search! After you’ve done all your budgeting and have all your ducks in a neat, planned-out row, you can begin to search for the home that fits your wants, needs, and budget!

Remember all the budgeting calculations you did above when you are filtering in your price range. It’s recommended to select a price range 10% above and below your calculations as a cushion when you are searching.

What to look for in location for a home:
  • A healthy economy: low unemployment rates and good incomes
  • A good real estate market: look at whether the homes in the neighborhood are selling well, meaning they sell close to or above their asking price.
  • A healthy community: look for a range of ages in the residents and families nearby.
  • A good school district: even if you don’t have children, being in a good school district will help your home retain its value and make selling your home easier should you need to sell later down the road.

Step 5: Enter Your Contract and Close the Deal!

Once you’ve made your choice you can work with your agent to make an offer to the sellers. If all goes through, your agent will draw up the papers and officialize a closing date, which is usually 45 to 60 days after the offer was accepted by the sellers.

When entering into a housing contract you will first want to make sure you have the following common contingencies in your agreement. This means that your contract relies on these personal requirements being met first:

  • obtaining a mortgage
  • getting a home inspection

Buying a home is a big deal and naturally you want to be as knowledgeable and savvy about the basics as possible. By applying these basic rules you will know how to buy a home in the smartest way possible.

Definitions of Key House Buying Terms

For an even bigger list of terms and definitions that you might need to know when buying a house, see the National Association of Home Builders’ (NAHB) Home Buyer’s Dictionary Page.

The Principal

The price of a home can also be referred to as the principal, especially by mortgage lenders. It refers to the base cost of the home, and does not include interest, fees, or closing costs. Many people use mortgages to pay for their home, meaning you’ll want to figure out how much mortgage you can afford when shopping home prices.

Down Payment

The down payment on a home is whatever the buyer can pay of the total price upfront. The less money put down in the beginning, the higher the interest rate on the mortgage will be, and the more the buyer will have to borrow from a lender. But the more you can put down in the beginning, the less you will have to borrow, and your interest rate will be lower as well. It is always advisable to pay as much for the house upfront as you can.

Homeowners Association Fees (HOA)

Some communities will be part of a Homeowner’s Association (HOA). Communities with an HOA are part of a planned community that often comes with communal benefits and amenities, like a pool, or snow ploughing. HOA’s also often come with certain rules for those who live in that community—rules about lawn upkeep and such—so make sure you understand the requirements and benefits of the HOA before committing to a house in their neighborhood.

Property Taxes

Owning a home and property will require you to pay property taxes each year. The percentage you pay in property taxes will depend on the location and value of your home. When looking in different locations for your home be sure to also look into what the property taxes are like in that area.


A mortgage is the loan program and payment plan you go on with a lender to eventually pay off your home. Unless you can afford to pay the entire price of the home upfront (100% down payment), you’ll need to take out a mortgage with a lender to help eventually pay off your home through monthly mortgage payments instead of all at once.

Mortgages come with different time periods to pay back the loan. There are 15-year mortgages, 30-year mortgages, and a 5/1 Adjustable Rate Mortgage (ARM).

  • A 15-year mortgage is when your payments go up more and more each year and your payments are going to be higher in general. But you’ll pay less interest overall and pay off your mortgage quicker. Buy a 15-year fixed rate mortgage to keep your rates the same throughout the 15 years.
  • A 30-year mortgage is going to allow for smaller payments, but in the long run you will pay more in interest, and it will take longer for you to pay off your mortgage.
  • A 5/1 adjustable rate mortgage is another kind of 30-year mortgage, but your interest rate stays the same for the first five years of the loan. After that initial five years, your interest becomes subject to whatever market changes there are for interest rates.
Homeowner’s Insurance

Homeowner’s insurance is insurance for your home. It can protect you when disasters, natural or otherwise, affect your house. It can even cover some of the costs for damages caused by natural disasters or crime.

It can also protect your possessions in these same scenarios and help you to replace whatever was lost or stolen. It is not illegal to not have homeowner’s insurance, but many lenders will require it. There are two kinds of homeowner’s insurance:

  • Cash-value coverage will help cover the costs of damages when they occur, but won’t usually be enough to rebuild your home should you need to.
  • Replacement-cost coverage is insurance that will cover the total cost of your house if you should ever need to rebuild it due to disasters. Most advisers will recommend you get this kind of homeowner’s insurance since it covers more.
Private Mortgage Insurance (PMI)

PMI stands for Private Mortgage Insurance. It is a form of insurance that lenders use to reduce their risks when a borrower can’t afford a down payment of at least 20 percent. Your lender will require a PMI when they are lending you more than 80% of your home’s total value. PMI is also a very costly form of insurance, but there are ways to get rid of it later by refinancing.

Interest Rate

Interest rate is a percentage of money added to your loan as payment to the lenders for borrowing a home loan from them. The interest rate you get on your mortgage will be determined based on your credit history and score. Usually the interest rate will be included in your monthly mortgage payments.

Credit History

Your credit history comes from your credit report and shows your history of paying debts and bills. It is meant to show how often you are on time or late in payments and your overall level of responsibility with your finances. Your credit history and score are what lenders will look at when deciding the interest rate they will put on your mortgage.

Credit Score

Your credit score differs from your credit history in that it is an overall score calculated from your credit history to show how much of a credit risk you are for the lenders. Instead of looking at an entire credit report or history, lenders can simply look at this score to get a quick, overall idea of your credit’s well-being.

Gross Income

Gross income refers to your total income before taxes.

Net Income

Net income refers to your total income after taxes. It is also referred to as “take-home pay.” When budgeting for housing payments it can be helpful to consider your monthly take home pay.

Even More Home Buying Resources

Visit the Department of Housing and Urban Development (HUD) for seminars and counseling about buying a home.

Visit the HUD’s common questions page for even more answers to your home-buying questions.

Use an online “How Much House Can I Afford” calculator to plug in your numbers into’s mortgage calculator and quickly see how much house you can afford.

Listen to NPR episodes about home-buying to learn more about the home-buying world.


written by Kimber Severance, Check City Copywriter