How many houses can I afford?

How much can I afford for a house?

Buying a home is one of the most important financial purchases you can make. But, before you do, understand how much you can afford so you don’t go into debt.

Knowing how much you can afford means being realistic about what you earn and your current and potential future debts. You need to consider unforeseen expenses and events and how your life might change in the future.

Rule 29/41

The 29/41 rule is a good rule of thumb when thinking about “how much house can I afford”. Of course, you don’t have to follow it exactly, but it’s a good guide to figuring out how much house you can afford.

The two numbers mean where your debt ratio should be to make your mortgage affordable.

The first number is your total mortgage payment and is called your housing ratio. Your housing ratio must not exceed 29% of your gross monthly income (pre-tax income). If applicable, your total mortgage payment includes principal, interest, property taxes, home insurance, homeowners association dues and mortgage insurance.

In other words, it focuses on the cost of owning a home and compares it to your gross monthly income. By focusing on this area, you avoid becoming “housing poor” or having buyer’s remorse.

Here is the formula:

Principal + Interest + Monthly property taxes + Monthly home insurance + Monthly HOA dues + Mortgage insurance

_______________________________________________________________________ × 100

Gross monthly income (income before taxes)

For example, let’s say your total housing costs for one month are $1,200. Your gross monthly income is $4,200. You would divide 1200 by 4200 to get 0.29 (rounded). Multiply that by 100 and you get a housing ratio of 29%.

Your housing ratio should not exceed 29% for best results. Not only will this help you get approved for more loan programs, but it will also ensure that your mortgage payment is affordable given your income.

The second number refers to your total debt, including the new mortgage payment as well as any other consumer debt you have, such as credit cards, personal loans, auto loans, child support, or student debt. Most people become homeowners with at least some debt, but you should do so with caution.

Ideally, your total debt should not exceed 41% of your gross monthly income for affordability purposes. Some loan programs allow a higher DTI, but it becomes harder to pay your mortgage payment if you do. Always compare total payments to your current budget to see how things stack up. Just because you’re approved with a higher DTI doesn’t mean it’s affordable for you.

*Note that you can use the minimum payment required for any revolving debt (credit cards) in this calculation.

Here is the formula:

Total monthly debt payments

___________________________________________________________________ x 100

Gross monthly income (income before taxes)

So let’s say you’re paying the $1,200 a month mentioned above, plus an additional $500 in debt for a car payment and student loans. You divide 1700 by 4200 to get 0.40 (round down). This means that your DTI is 40% with your mortgage payment.

Now, is it okay if your total DTI exceeds 41%? In some cases, yes, but keeping it at 41% can mean a more affordable mortgage payment and can get you better rates and terms.

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