First Time Buyers Home Guide: How Much Home Can You Afford?

You've saved for your down payment, now it is time to determine how much you can spend on your new home. Here are some quick tips to help:

Consider your salary as a starting point

Getting a ballpark estimate of how much home you can afford boils down to how much money you're pulling in.

“The general rule of thumb is that you can purchase a home that costs two or three times your annual salary," says Harrine Freeman, a financial expert and the owner of H.E. Freeman Enterprises.

So if you're making $80,000 per year (and you have a reasonable amount of job security), that means you can afford a house up to three times that, or $240,000. That said, “this is only an estimate and does not account for your monthly bills," says Freeman. So let's dive into more specifics.

Follow the 28/36 rule

If you're overwhelmed by numbers, budgets, and big-ticket decisions, follow the 28/36 rule, a simple but effective guide for affordability. The “28" refers to your monthly housing payments—things such as mortgage, insurance, and taxes—which shouldn't be more than 28% of your gross monthly income (ideally it should be less). This is easy to calculate, because all you need to do is multiply. For example, if your gross (meaning before taxes are taken out) monthly income is $6,000, multiply that by 28% (or 0.28) and that means you shouldn't pay more than $1,680 on your home.

The “36" refers to your debt-to-income ratio, which compares how much money you owe (to credit cards, colleges, car loans, and—hopefully soon—a home loan) to your income. This ratio should be “no more than 36%," says Freeman; ideally, it should be much less. Think about it in terms of your monthly expenses: If you make $6,000 per month but spend $500 paying off debts, you divide $500 by $6,000 to get a debt-to-income ratio of 8.3%. This is great, but adding $1,680 per month in mortgage payments would push up your monthly debt load to $2,180 and your debt-to-income ratio to 36%. This is exactly the maximum experts say you can afford. Going past this threshold is a risky move.

Once you know both these numbers, as well as how much of a down payment you plan to contribute, you can easily work out the maximum monthly mortgage payment you can afford.

Apply for mortgage pre-approval

Another easy way to get a sense of how much home you can afford is to approach a lender and apply for mortgage pre-approval: That's where they'll take a look at your financial past and present circumstances to determine how much money they're willing to loan you to buy a home. Added bonus: Mortgage pre-approval makes you a more attractive home buyer to sellers, since they know you've got financing to back up your offer.

Once you've determined what kind of house you're looking for, it's time to put your feet to the pavement and start checking out the market in person. To do that, you'll need a Realtor®.

 

This article is provided by: Jamie Wiebe writes about home design and real estate for realtor.com. She has previously written for House Beautiful, Elle Decor, Real Simple, Veranda, and more.  http://www.realtor.com/advice/buy/house-you-can-afford/