How Much Can You Afford To Spend on a Home

To get a quick idea of what you can afford to spend, multiply your annual gross income by 2.5. For example, if your annual household income is $50,000, you might be able to qualify for a $125,000 home. This is just a rough estimate – the actual number will vary based on factors such as current interest rates and the rate for which you'll qualify based on your debt and credit history, as well as other financial factors.

Mortgage lenders typically use two ratios to more accurately determine how much you can afford to spend on your mortgage.

• Housing Expense Ratio - Mortgage lenders recommend that your monthly mortgage payment be less than 28% of your monthly gross income and that your recurring debt plus your monthly mortgage payment be no more than 36%. This percentage can change based on the type of mortgage you choose and sometimes the area in which you're looking to buy.

• Debt-to-Income Ratio - You need to factor your other debts into determining an affordable monthly mortgage payment. Mortgage lenders look at whether your total debt is larger than 30-40% of your monthly gross income. Remember, debt is not just credit cards and student loans. It can also include alimony, child support, car loans, and housing expenses.

These guidelines may vary slightly in different states, so talk to a mortgage lender or housing counselor who can help you better understand the guidelines or requirements. Before you talk to one, organize your financial picture by creating a budget [PDF 73K]. Don't forget that you also have to save for the down payment, closing costs, inspection costs, moving, and other related expenses, and be sure to factor in any future plans that might impact your household budget.

Give yourself a buffer. Remember that the mortgage is not the only expense of homeownership. Other expenses include homeowner's insurance, interest and taxes (which may be factored into your monthly mortgage payment), maintenance costs, utilities, and other expenses you probably didn't pay for as a renter, such as water and garbage, and unexpected repairs. When deciding what you can afford, be sure to look at the big picture and not just the price of the home.

To calculate a payment use our mortgage calculator: