When the time comes to buy a home, you may be wondering how much you can afford. Whether you’re a first-time homebuyer, relocating or simply need a bigger home with more space, figuring out your monthly budget is critical in determining a comfortable purchasing price.
There are several steps you should take to calculate how much you can afford to spend on a house:
Figure out your monthly income after taxes
First look at your paystubs to calculate how much you bring home each month after taxes. If you are married, figure out your combined monthly income.
Add up your recurring bills
Determine the total of your monthly bills:
- Bills you pay monthly (car loan, electricity, cable, cell phone, etc.)
- Bills you pay weekly, quarterly or yearly (find the monthly average, depending on how often you pay them)
- Gas for your vehicle
- Extra expenses/miscellaneous (pets, child care, etc.)
Calculate how much you can comfortably afford monthly
Once you’ve determined the above totals, calculate how much you have remaining. Take the total of your recurring bills and subtract that from your total monthly income after taxes. The remaining amount can be used toward the cost of a new home. However, keep in mind that you do not want to be 'house poor.' Having additional money for unexpected expenses and savings will help limit undue stress in the future.
Figure out how much house can you afford.
Once you’ve determined the total amount you have available to spend monthly on a new home, you can then figure out the maximum mortgage payment you’re eligible for. A quick way to estimate this is to take your gross income and multiply by .31. This will give you the mortgage payment you are eligible for if you have no other debt. However, if you do have debt, the amount you would qualify for will decrease.
As another safe measure, be sure to take your recurring monthly bills and add that number to the max mortgage payment. That should not exceed your gross monthly income.
It is best to consult with the specific lender you will be using to find out exact rates and payment information. You can also click here to use our mortgage calculator!