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How Much House Can You Afford?

The first step of any home-buying journey is to figure out how much house you can actually afford. Remember, you’re the boss! Your financial future is counting on you to make smart choices today.

It doesn’t matter if the kitchen is fabulous or the backyard is big. If you can’t pay the mortgage each month or find the cash to fix what’s broken, your home will become a burden—not a blessing. But no worries—we’ll show you how to be smart with your home-buying budget.

Calculate the Costs

By simply crunching a few numbers, you can figure out how to buy a home that won’t bust your budget. Follow the steps below to determine how much house you can afford.

1. Figure out 25% of your take-home pay.

If you’re getting a mortgage, never purchase a house with a monthly payment that chews up more than a fourth of your take-home pay—otherwise, you’d be house poor!

That 25% limit includes principal, interest, property taxes, homeowner’s insurance and, if your down payment is lower than 20%, private mortgage insurance (PMI). Plus, don’t forget to consider homeowner’s association (HOA) fees when preparing your budget—in case your new home is part of an HOA.

To be clear, take-home pay is also called net income—the amount that goes into your bank account after taxes and other deductions are subtracted from your gross income. If you’re married, you’ll also want to include your spouse’s net monthly income into this amount.

Let’s say your total monthly take-home pay is $6,600. Simply multiply that amount by 25% to get your maximum monthly house payment. If you take home $6,600 a month, your monthly house payment should be no more than $1,650.

2. Use a mortgage calculator to try out different home prices within your budget.

Next, use a mortgage calculator to try out different home prices and down payments to find a monthly payment that is within 25% of your take-home pay.

Let’s test this out on our example of a maximum monthly house payment of $1,650. Using our mortgage calculator, if you enter in a 15-year fixed-rate type of mortgage at a 4% interest rate, a 1.14% property tax rate and a homeowner’s insurance policy that costs $1,200 per year, here are some home prices within your budget:

  • $185,000 home with a 10% down payment ($18,500)

  • $225,000 home with a 20% down payment ($45,000)

  • $253,000 home with a 30% down payment ($75,900)

  • $287,000 home with a 40% down payment ($114,800)

Remember, these are just estimates. Use our calculator to try other combinations and find the right mortgage amount, interest rate and down payment for your budget.

3. Factor in homeownership costs.

Your emergency fund can cover major home disasters, but some homeownership expenses need to be factored into your monthly budget, such as:

  • Utilities. Things like paying for electricity, gas, water, internet and trash pickup may cost more or less depending on the house. But on average, if you’re used to paying $100–150 on utilities as a renter in an apartment, you might need to bump up that budget closer to $400 a month as a homeowner.1
  • Maintenance and repairs. Most people complete an average of nearly seven home maintenance projects in a year, costing a total of $1,100.2 Depending on the age of the home, projects could include things like maintaining the yard or HVAC system, repairing a leaky roof or cracked driveway, or solving a mold problem.
  • Upgrades and additions. If you’ll be saving up for a few major home upgrades, you’ll need to build room in your monthly budget for those expenses too. A minor kitchen remodel alone costs nearly $23,500.3

After you figure out how much house you can afford, you’ll have more confidence saving for the right down payment amount and finding a realistic home you love.

 

Rhonda Buckner, our Ocala Trusted Realtor, will help you with each step. Give her a call 352-266-2637