How Much Home Can You Truly Afford?

So you’ve decided that this will be the year you buy a home! You’ve put in the work to increase your credit score and potentially save for a down payment. But what now? Now you step back to see how much home you can feasibly afford. There are dreams and then there is reality. Shows like HGTV’s ‘House Hunters’ have become synonymous with the dream… where a couple whose jobs are laughable are buying million dollar homes. We know that’s not how most people live. On the flip side of the irrational is the real world and we here in the real world have bills to pay.

An easy place to start is to simply look at your annual income. Generally, it’s easy enough to assume that you’ll be approved for a mortgage that is two or three times your salary. Say you’re pulling it $70,000. You could assume that, barring wild economic swings or instability, you’ll be approved for a mortgage in the ballpark of $210,000.

Obviously, this is just a simple, quick-math solution. Other factors like your monthly bills and outstanding debt play a significant role.

It’s a Numbers Game

While you’re annual income accounts for about half of the reasoning behind your pre-approval, the other half comes from what you already owe. If you make that $70,000 a year but half of your monthly bills are already going towards credit card payments, student loan payments, and other debt, you have less liquid cash to spend every month.

Pros like to recommend a 28/36 ratio. Meaning, an ideal house payment (this includes your mortgage, insurance, and property taxes) should account for no more than 28% of your monthly income. A figure less than this is ideal. Additionally, your outstanding debts should account for no more than 36% of your monthly bills.

These ratios are exactly the maximums that experts say most people could afford. Sticking to these numbers ensures you don’t become ‘house poor’ and end up way more in debt than your started.

Get Pre-Approved

Oftentimes, it helps to speak with a mortgage lender before you even start out with making viewing appointments. If you talk to a lender, they will look at your income, debts, credit score, and credit report to determine how much money they’d be willing to lend you. Armed with this number, you can feel secure scheduling viewings for homes and knowing they’re within your purchasing power.

Next up: finding a Realtor who will work for YOU. Stay tuned!