Buying a House – How Much House Can I Afford?

This is part one of the Buying a House series and if you’re reading this, I’m going to assume that you are either considering purchasing a home or you’re at least interested in the process. To establish some credibility before we get started, I recently went through the home-buying process with my wife for the first time. I had some ideas as to what the process would be like, but there were learning opportunities all along the way.

By and large, most people want a really nice house. One with a nice front yard, a nice backyard, a few more bedrooms than you currently need, an extra bathroom or two, hardwood floors, granite counter tops, a two-car garage, tall ceilings, plenty of storage, and top-of-the-line appliances. All of this sounds great to me too, but I couldn’t get all of this with my budget. There’s no sense in considering high-priced houses in your search if you can’t afford them, so the first thing you need to do is figure out how much house you can afford.

This should be fairly easy for you to do. Assuming you don’t have an enormous amount of debt and crazy income-depleting bills, a good rule of thumb is to make sure your monthly payment is at or below 25% of your take-home pay. This means if you take home $4000 every month after taxes, you should make sure that your monthly payments are no more than $1000. If you do have a lot of debt and a decent amount of your income is going towards paying that off, you should consider opting for a less expensive house with a lower monthly payment.

I’m guessing you next question is, “how do I know what the monthly payments will be?” Well, this is where I’m going to point you to this handy-dandy mortgage calculator. To figure out how much house you can afford, click the “How much house can I afford?” button at the bottom left. Input your monthly take-home pay and this calculator will show you the maximum amount your total mortgage should be, and also the maximum price of the house based on your down payment.

As I’m sure you already know, real estate agents get paid when you buy a house. They get paid by commission, meaning they will get a percentage of the sale price. It’s not hard to see why they might want to steer you in the direction of the pricier houses and I can’t blame them, that means more money for them. It is up to you to figure out how much house you can reasonably afford and give the real estate agents that number as your maximum buying price.

Next part of the Buying a House series will be about searching for the right house, so check back!

Notes:

  1. Featured image courtesy of TaxRebate.org.uk
  2. Disclaimer: I am not a certified financial planner or financial advisor.
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