If you’re looking to buy a new home – particularly if it’s your first home – you’re probably asking yourself a few big questions. “How much house can I afford?” is likely at the top of that list.
It makes sense, too, as this is a pretty significant concern. Ensuring that you can not only qualify for a certain level of mortgage but then continue making those payments for as many as 30 years is a tall order. Luckily, we have a few tips for calculating your own mortgage sweet spot.
Needs vs. Wants
If you’re considering buying a home, it helps to know how much you can afford. This will tell you the dollar amount you need to stay below to make a financially wise home-buying decision.
It’s very important to think of this question from two different perspectives, though.
The first is simply, how high of a mortgage will you qualify for? The answer to this question depends on a lot of factors. Some of these factors include your income, existing debts, interest rates, credit history, and credit score.
(In a moment, we’ll look at several calculations that most lenders use to evaluate mortgage applicants. That way, you can narrow this answer down a bit before you even begin the application process.)
The second perspective is a bit more subjective: how much home do you really need? Just because you can qualify for a mortgage doesn’t mean that you should.
Banks will qualify you for as much as possible, given their existing underwriting policies. But just because the money is available doesn’t mean you should take it. This is where you need to rein in your wants to make a smart mortgage decision.
Let’s look at five ways to calculate how much house you can afford, beginning with a standard rule of thumb.
1. Multiply Your Annual Income by 2.5 or 3
This was the basic rule of thumb for many years. Simply take your gross income and multiply it by 2.5 or 3 to get the maximum value of the home you can afford. For somebody making $100,000 a year, the maximum purchase price on a new home should be somewhere between $250,000 and $300,000.
Keep in mind that this is a very general rule of thumb, and several factors will influence the results. For example, the lower the interest rate you can obtain, the higher the home value you can afford on the same income.
This is one reason why your credit score is so important. A good credit score of 760 or higher could net you an interest rate that is 1.5% lower than if you had a fair score of, say, 620. A 1.5% lower rate can easily translate into savings of tens of thousands of dollars over the life of a mortgage.
If you don’t know your credit score, you can get your FICO score for free from one of several credit scoring companies.
Also, keep in mind that others may suggest using higher or lower multiples to determine your ideal home purchase price. I’ve seen banks recommend ratios as low as 1.5 times your salary or as high as five times your salary. I think that for most situations, a good starting point is 2.5 times your income.
2. The 28% Front-End Ratio
When banks evaluate your home loan application, they will look at one very important calculation in particular. This is known as your housing-expense-to-income ratio.
Also called the front-end ratio, banks will take your projected housing expenses for the home you want to buy and divide them by your total monthly income. Generally, mortgage companies are looking for a ratio of 28% or less.
For example, let’s say that your income is $10,000 a month. Judging by this, most banks would qualify you for a loan (subject to other factors, of course), so long as your total housing expenses do not exceed $2,800 each month. This means that your mortgage payment (principal and interest), property taxes, PMI (if required), and homeowner’s insurance all need to stay below this threshold.
While the 28% mortgage-to-income ratio is followed by many institutions, some will qualify a borrower with a slightly higher ratio. Again, it all depends on the lender, your credit history, and other individual factors.
Resource: 11 Home-Buying Programs for Low-Income Families
3. The 36% Rule
Even if your housing-expense-to-income ratio is 28% or less, you still have one more hurdle to clear: the debt-to-income ratio.
Also referred to as the back-end ratio, this takes into account your total monthly minimum debt payments and then divides them by your gross income. This ratio is used in conjunction with the front-end ratio above, to give lenders a holistic view of your financial situation. With these two in mind, they’ll be able to make a clearer determination as to whether or not you’ll be approved for your requested mortgage loan.
All sorts of debt payments are taken into account for the back-end ratio. These include not only your projected mortgage, but also minimum credit card payments, auto loans, student loans, and any other payments on debt. Even child support payments are included.
Bankers typically are looking for a back-end ratio of no more than 36%, although some will go a bit higher than this. To relate both the 28% front-end and 36% back-end numbers, here is a chart showing the calculations for various income levels:
| Gross Income | 28% of Monthly Gross Income | 36% of Monthly Gross Income |
|---|---|---|
| $20,000 | $467 | $600 |
| $30,000 | $700 | $900 |
| $40,000 | $933 | $1,200 |
| $50,000 | $1,167 | $1,500 |
| $60,000 | $1,400 | $1,800 |
| $80,000 | $1,867 | $2,400 |
| $100,000 | $2,333 | $3,000 |
| $150,000 | $3,500 | $4,500 |
4. Special FHA Rules
An FHA mortgage has special rules set by the government. This means there is less “wiggle room” when qualifying for these loans versus conventional mortgage products.
For the mortgage payment expense-to-income ratio (front-end), the percentage cannot be greater than 29%. Since this is the government we’re talking about, you won’t be able to sweet-talk your way into getting that waived for an extra percentage point or two, either. For the back-end ratio, the maximum to still qualify for an FHA loan tops out at 41%.
Note that although FHA loans are government-sponsored, you will still apply for the loans through private banks and mortgage companies. If you’d like to get see current rates, check out our mortgage rates, which are updated daily.
Note that although FHA loans are government-sponsored, you will still apply for the loans through private banks and mortgage companies.
Read more: How to Qualify for an HFA Morgage
5. The Dave Ramsey Mortgage
Dave Ramsey takes a very conservative approach to home-buying. If you can swing it, he believes you should pay cash for a home. Of course, this is a tall order for many people who struggle to just save up enough for the down payment.
If you do have to take out a mortgage, Ramsey says you should finance your home with a 15-year mortgage (rather than a 30-year). He also says that your mortgage payments, including insurance and taxes, should be no more than 25% of your take-home pay. Lastly, he believes that you should not buy a home until you have at least a 20% down payment.
If you decide to follow Dave’s approach, simply divide the amount of down payment you have available by .20. For example, if you have $25,000 saved for a down payment, the maximum amount you could spend on a home would be $125,000 ($25,000 / .20).
Using this example, you’d finance $100,000 with a 15-year mortgage through your lender of choice. At prevailing rates, and making some assumptions about insurance and taxes, the monthly payment would be somewhere in the vicinity of $1,000.
Of course, you’ll also need to ensure that you have the income to handle the mortgage payments, especially since you’ll be paying more each month with a 15-year note than you would with a 30-year. Here is a table of your maximum monthly payment under the Dave Ramsey approach to mortgages. (I’ve assumed that the take-home pay is 75% of gross income.)
| Gross Income | Monthly Take-Home | Maximum Monthly Payment |
|---|---|---|
| $20,000 | $1,250 | $312 |
| $30,000 | $1,875 | $468 |
| $40,000 | $2,500 | $625 |
| $50,000 | $3,125 | $781 |
| $60,000 | $3,750 | $937 |
| $80,000 | $5,000 | $1,250 |
| $100,000 | $6,250 | $1,562 |
| $150,000 | $9,375 | $2,343 |
If you are a first-time homebuyer, following Dave’s approach is going to be very difficult. Heck, it may even be difficult if you are buying your second or third home. We certainly could not have bought our first or second home under these conditions, but it’s still an approach to consider.
Related: How to Buy a House with No Money Down
FAQs
What house can I afford on $50k a year?
How much house you can afford with $50,000 a year depends on your situation, interest rate and credit score — as well as your down payment. If you work backward, a salary of $50,000 a year amounts to $4,166 per month. If you follow the 30% rule, you’d want your mortgage payment to be no more than $1,250 per month. At that point, with a 3.34% interest rate, you could borrow $285,000. This doesn’t account for taxes and insurance, so keep that in mind as well.
How much should you spend on a house?
Your comfort level and financial situation dictate how much you should spend on a house. Try to make sure that you can easily make your payments. There’s a rule of thumb that says 30% of your income should be spent on a house. However, you might be more comfortable with spending only 25%.
How much house can I afford – rule of thumb
The rule of thumb is that your mortgage payment, including principal, interest, insurance, and taxes, should amount to no more than 30% of your pre-tax income. However, other people tweak this rule of thumb to use after-tax income instead of pre-tax, or drop the number to 25% of your monthly income.
How to calculate an affordable mortgage
When calculating an affordable mortgage, make sure you think about how much you can comfortably pay each month. Items to consider include your other expenses, including other debt payments you have. One of the rules that some lenders use to determine whether you qualify for the best terms is the 28/36 qualifying ratio. This ratio says your mortgage payment shouldn’t amount to more than 28% of your monthly income and your total debt payments — including the new mortgage — should amount to no more than 36% of your monthly income.
I make $70k a year; how much house can I afford?
How much mortgage you can afford depends on your situation and what you’re comfortable with. However, if you make $70,000 a year, your monthly income is about $5,833. If you use the 30% rule, your mortgage payment should be no more than $1,750 per month. Figuring a 30-year mortgage at 3.312% interest, you could potentially borrow close to $400,000. However, how much you can afford depends on your credit, down payment, and other costs like taxes and insurance.
Next Steps
You now know how to calculate the home that you can realistically (and responsibly) afford. Now you may have some financial plans to set in motion. Maybe you realize that you need to save up a bit more for your down payment. Or perhaps you need to adjust the home price that you’re seeking.
It’s always wise to get your credit in tip-top shape before mortgage shopping. A good credit score will help you snag the best possible interest rate available. This may take a few months (or longer!). So it’s wise to start cleaning up your report as soon as you can if needed.
A quick way to get started on this is by signing up for Experian Boost™. This service can track your positive monthly payments and use that information to give your FICO Score a boost. Start now for free or read more about it in our Experian Boost Review.
Related: What Credit Score Do You Need to Buy a Home?
Finally, if you are saving to buy your first home, a great tool to track your finances is Empower’s free financial dashboard. Connect your accounts and it will track your spending, saving, and even your investments.
Ready to buy? Read our guide on How to Buy Your First Home
(Personal Capital is now Empower)
Empower Personal Wealth, LLC (“EPW”) compensates Webpals Systems S. C LTD for new leads. Webpals Systems S. C LTD is not an investment client of Personal Capital Advisors Corporation or Empower Advisory Group, LLC
Rob Berger is the founder of Dough Roller and the Dough Roller Money Podcast. A former securities law attorney and Forbes deputy editor, Rob is the author of the book Retire Before Mom and Dad. He educates independent investors on his YouTube channel and at RobBerger.com.
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FAQs
What is the formula for how much house you can afford? ›
Most financial advisors recommend spending no more than 25% to 28% of your monthly income on housing costs. Add up your total household income and multiply it by . 28. At most, you may be able to afford a $1,120 monthly mortgage payment.
How much house will $3,000 a month buy? ›For example, if you make $3,000 a month ($36,000 a year), you can afford a mortgage with a monthly payment no higher than $1,080 ($3,000 x 0.36). Your total household expense should not exceed $1,290 a month ($3,000 x 0.43). How much house can I afford with an FHA loan?
How much house can I get for $2 000 a month? ›With $2,000 per month to spend on your mortgage payment, you are likely to qualify for a home with a purchase price between $250,000 to $300,000, said Matt Ward, a real estate agent in Nashville. Ward also points out that other financial factors will impact your home purchase budget.
What is the rule of thumb for how much house you can afford? ›The 28% mortgage rule states that you should spend 28% or less of your monthly gross income on your mortgage payment (e.g., principal, interest, taxes and insurance). To determine how much you can afford using this rule, multiply your monthly gross income by 28%.
How to use the 25% rule to know how much house you can afford? ›To calculate how much house you can afford, use the 25% rule—never spend more than 25% of your monthly take-home pay (after tax) on monthly mortgage payments. That 25% limit includes principal, interest, property taxes, home insurance, PMI and don't forget to consider HOA fees.
How to afford a 500k house? ›To afford a $500,000 home, a person would typically need to make about $140,000 a year, said Realtor.com economic data analyst Hannah Jones. The principal and interest payments would total $2,791 per month, and with taxes and insurance, that number comes up to $3,508.
How much would a $1 million dollar house cost a month? ›A 30-year, $1,000,000 mortgage with a 4% interest rate costs about $4,774 per month — and you could end up paying over $700,000 in interest over the life of the loan. Our goal is to give you the tools and confidence you need to improve your finances.
How much is a 2 million dollar house a month? ›The national average for a 30-year fixed-rate jumbo loan mortgage is around 3.5%. At that rate, the monthly mortgage payment for a $2 million home will be around $7,800 per month, with a 20% down payment.
How much house will $900 a month buy? ›A payment of $900 would have a mortgage balance of $191,976. If you include your monthly taxes, insurance and mortgage insurance payment of $300 a month, you now have a payment of $1,200 a month.
How much is an $800,000 house a month? ›Monthly payments on an $800,000 mortgage
At a 7.00% fixed interest rate, your monthly mortgage payment on a 30-year mortgage might total $5,322 a month, while a 15-year might cost $7,191 a month.
Can I afford a 2 million dollar home? ›
Family Budget With A Two Million Dollar House
$3,000 more a month is $36,000 a year after tax, or about $50,000 more in gross income a year. If you had a down payment, you would need to make at least $400,000 a year income to afford a $2 million house.
To determine whether you can afford a $650,000 home you will need to consider the following 4 factors. Based on the current average for a down payment, and the current U.S. average interest rate on a 30-year fixed mortgage you would need to be earning $126,479 per year before taxes to be able to afford a $650,000 home.
Can I buy a house making $20 an hour? ›With some planning, or should I rather say, with a structured plan, you can own your very own property. Yes it's possible to to afford a house making $12 an hour so if you make $20 an hour buying a house should be even easier.
How much income do you need to buy a $400000 house? ›Assuming a 30-year fixed conventional mortgage and a 20 percent down payment of $80,000, with a high 6.88 percent interest rate, borrowers must earn a minimum of $105,864 each year to afford a home priced at $400,000.
What house can I afford with a $100 K salary? ›“Assuming other factors such as creditworthiness and debt-to-income ratio are favorable, someone with a $100,000 salary could potentially afford a home in the range of $300,000 to $400,000,” said Boyd Rudy, team leader and associate broker with MiReloTeam Keller Williams Realty Living.
How much house can I afford on $48,000 a year? ›It's possible to afford a house worth anywhere from about $190,000–$260,000 on a $48,000 a year salary. But income isn't the only detail to consider when buying a home. Factors such as the location of your home, the size of your down payment, and your interest rate will determine what you can afford.
What is the 50 30 20 rule house? ›The numbers refer to the share of take-home pay allocated to different areas of your life: 50% of a paycheck for necessities, the “must have” items such as food, housing and transportation; 30% to discretionary spending, the “wants” category, which might include entertainment, travel and shopping; and 20% to saving and ...
Can I afford a 300k house on a 70K salary? ›On a $70,000 income, you'll likely be able to afford a home that costs $280,000–380,000. The exact amount will depend on how much debt you have and where you live — as well as the type of home loan you get.
How to afford a $1000000 house? ›To afford a 1 million dollar home, you need a minimum annual income of $200,000 to $225,000. You'll also need to have enough money saved for the down payment and closing costs, which can add up to over 20% of the purchase price. There are a variety of reasons someone might want a million-dollar home in the first place.
How much to afford a 300K house? ›To purchase a $300K house, you may need to make between $50,000 and $74,500 a year. This is a rule of thumb, and the specific salary will vary depending on your credit score, debt-to-income ratio, type of home loan, loan term, and mortgage rate.
Can I afford an $800,000 house? ›
For homes in the $800,000 range, which is in the medium-high range for most housing markets, DollarTimes's calculator recommends buyers bring in $119,371 before tax, assuming a 30-year loan with a 3.25% interest rate. The monthly mortgage payment is estimated at $2,785.
How much do you need to make to buy a $900000 house? ›A $900,000 home, with a 5% interest rate for 30 years and $45,000 (5%) down requires an annual income of $218,403. This estimate is for an individual without other expenses, and your situation may differ.
What is the most expensive house per month? ›Palazzo di Amore in Beverly Hills, California is up for rent at A$433,000 per month. You wouldn't know there's any such things as a housing or cost of living crisis when looking at the rent wanted for this high, high, high end home.
How much monthly is a 300k mortgage? ›On a $300,000 mortgage with a 3% APR, you'd pay $2,071.74 per month on a 15-year loan and $1,264.81 on a 30-year loan, not including escrow. Escrow costs vary depending on your home's location, insurer, and other details.
How much to afford a 600k house? ›What income is required for a 600k mortgage? To afford a house that costs $600,000 with a 20 percent down payment (equal to $120,000), you will need to earn just under $90,000 per year before tax. The monthly mortgage payment would be approximately $2,089 in this scenario. (This is an estimated example.)
How much house can I afford if I make $70,000 a year? ›If you're an aspiring homeowner, you may be asking yourself, “I make $70,000 a year: how much house can I afford?” If you make $70K a year, you can likely afford a home between $290,000 and $360,000*. That's a monthly house payment between $2,000 and $2,500 a month, depending on your personal finances.
How much is a 30-year mortgage payment for $100 000? ›Assuming principal and interest only, the monthly payment on a $100,000 loan with an APR of 3% would come out to $421.60 on a 30-year term and $690.58 on a 15-year one.
How much is a $400,000 house per month? ›“The average monthly payment for a $400,000 home is $3,037,” says Walsh. “That's based on the typical first-time homebuyer down payment of 7%, average interest rate of 6.61%, average property tax rate of 1%, average homeowners insurance of $140 per month, and average Private Mortgage Insurance of 0.6%.”
How much house can I afford if I make $80000 a year? ›For the couple making $80,000 per year, the Rule of 28 limits their monthly mortgage payments to $1,866. Ideally, you have a down payment of at least 10%, and up to 20%, of your future home's purchase price. Add that amount to your maximum mortgage amount, and you have a good idea of the most you can spend on a home.
How much house can I afford for $10,000 a month? ›Housing Ratio
As a rule of thumb, your housing budget should be no more than 1/3 of your income or approximately 35%. So if you are making 10K per month, 3.5K is a reasonable housing budget.
How much is a 500k house a month? ›
The average mortgage rate for a $500,000, 30-year fixed-rate loan is around 5.4% for those with good credit. So, your monthly payment would be around $2250 without taxes and fees.
How much a month is a 200k house? ›On a $200,000, 30-year mortgage with a 4% fixed interest rate, your monthly payment would come out to $954.83 — not including taxes or insurance. But these can vary greatly depending on your insurance policy, loan type, down payment size, and more.
How much would you pay a month for a 100000 house? ›Monthly payments on a $100,000 mortgage by interest rate
At a 7.00% fixed interest rate, a 30-year $100,000 mortgage may cost you around $665 per month, while a 15-year mortgage has a monthly payment of around $899.
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Stick to the 28/36 Rule. No matter how you finance your home purchase, most experts agree that people should not spend more than 28% of their gross income on housing expenses, and no more than 36% on debt. For example, if you earn $5,000 each month, your ideal mortgage payment should be no more than $1,400 per month.
How much income do you need to buy a $450 $0.00 house? ›To finance a 450k mortgage, you'll need to earn roughly $135,000 – $140,000 each year. We calculated the amount of money you'll need for a 450k mortgage based on a payment of 24% of your monthly income. Your monthly income should be around $11,500 in your instance. A 450k mortgage has a monthly payment of $2,769.
How much house can you afford at 50 000 a year? ›As a rule of thumb, someone making $50,000 a year might be able to afford a home loan of anywhere from $100,000 to $150,000. This is because, generally, it's advisable to spend no more than two to three times your household income on a mortgage.
Is the 28 36 rule realistic? ›Generally, your income should be about seven times your debt; 36% is the recommended DTI ratio, The 28/36 rule isn't a hard-and-fast guideline, but if you follow it when you set your budget for a new housing situation, it can help you get approved for a rental or a mortgage loan.
How much do I need to make a year to afford a $300 K house? ›How much do I need to make to buy a $300K house? To purchase a $300K house, you may need to make between $50,000 and $74,500 a year. This is a rule of thumb, and the specific salary will vary depending on your credit score, debt-to-income ratio, type of home loan, loan term, and mortgage rate.
How much do I have to make a year to afford a $400000 house? ›
Assuming a 30-year fixed conventional mortgage and a 20 percent down payment of $80,000, with a high 6.88 percent interest rate, borrowers must earn a minimum of $105,864 each year to afford a home priced at $400,000.
How much house can you afford on $100 000 salary? ›A 100K salary means you can afford a $350,000 to $500,000 house, assuming you stick with the 28% rule that most experts recommend. This would mean you would spend around $2,300 per month on your house and have a down payment of 5% to 20%.
What is the 3 7 3 rule in mortgage? ›Timing Requirements – The “3/7/3 Rule”
The initial Truth in Lending Statement must be delivered to the consumer within 3 business days of the receipt of the loan application by the lender. The TILA statement is presumed to be delivered to the consumer 3 business days after it is mailed.
The 50/30/20 rule can be a good budgeting method for some, but whether the system is right for you will be determined by your unique circumstances. Depending on your income and where you live, 50% may not be enough to cover your needs.
Is the 70 20 10 rule good? ›Adhering to the 70-20-10 budget rule is a great way to make sure monthly expenses are allocated correctly and debt can be paid down. This commonly used budget style suggests that the remaining 10 percent is used for paying off existing debts.
How much income do you need to buy a $800000 house? ›For homes in the $800,000 range, which is in the medium-high range for most housing markets, DollarTimes's calculator recommends buyers bring in $119,371 before tax, assuming a 30-year loan with a 3.25% interest rate. The monthly mortgage payment is estimated at $2,785.
How much house can I afford if I make $120 000 a year? ›Safe debt guidelines
If you make $50,000 a year, your total yearly housing costs should ideally be no more than $14,000, or $1,167 a month. If you make $120,000 a year, you can go up to $33,600 a year, or $2,800 a month—as long as your other debts don't push you beyond the 36 percent mark.
Following this logic, you would need to earn at least $300,000 per year to buy a $600,000 home, which is twice your salary. “Other rules say you should aim to spend less than 28% of your pre-tax monthly income on a mortgage,” says Hill.
What is the monthly payment on a $600000 mortgage? ›Monthly payments on a $600,000 mortgage
At a 7.00% fixed interest rate, your monthly mortgage payment on a 30-year mortgage might total $3,992 a month, while a 15-year might cost $5,393 a month.
$100,000 is $48.08 an hour without vacation time.
If you work a full 40-hour week for 52 weeks, that amounts to 2,080 hours of work. So $100,000 a year in income divided by 2,080 is a $48.08 hourly wage.
How much a month is 100k a year? ›
If you're earning $100,000 per year, your average monthly (gross) income is $8,333.
What house can I afford on 150k a year? ›The lower your down payment, the higher your monthly mortgage payment. “With a $150,000 income, you could potentially save up to $100,000 – 20 percent – within a few years,” says Shri Ganeshram, CEO of real estate website Awning. “This would allow you to purchase a home in the $500,000 range.”