How Much House Can I Afford?

So you’ve decided to buy a house…….

Congratulations!!!! 😊 and Hello Awin!

For many, the purchasing of a home is the signal of a change in their life. Establishing roots, maybe getting married, or even starting a family.

Whatever your reason, buying a house is a huge undertaking and is exciting! There are a lot of great benefits to owning a home. However, it’s crucial to be realistic about what you can afford especially given the recent housing demand driving prices higher by the day.

It’s best to shop for homes within your price range so you don’t fall madly in love with a home that there is no way you can afford. The question you may be asking yourself is, “How much house can I really afford?”

Today’s article is going to address that. Let’s get started!

Why The Mortgage Broker May Give You Misleading Information

If new to home buying, odds on, you started working with a mortgage broker to help you find the best rates and figure out how much you can afford. Mortgage brokers can help you find the best deals and (if you find a good one) can help you consolidate some outstanding debt into the mortgage (if you choose). This way you only make a 1 payment and save a few bucks on monthly payments in the process.

Be wary. They are NOT financial advisors but a side effect of helping people with getting their mortgage is understanding finances and leveraging a mortgage to help with finances. It’s ok to listen to their advice. Just do it with a grain of salt and make sure common sense prevails. If it doesn’t feel right DO NOT do it.

For all the good mortgage brokers can do, there are some drawbacks and things to watch out for. At the end of the day, the mortgage broker is not helping you out of the kindness of their heart but are looking to earn an income.

Mortgage brokers earn a commission for each mortgage loan they process. The typical range of the commission is 1-2% but can be higher depending on several factors. To put that into perspective, if they sell a mortgage loan worth $100,000, they make $1,000 – $2,000. If they sell a mortgage loan worth $200,000, they make $2,000 – $4,000. Same amount of work but their commission doubled based on the size of the mortgage.

Think all they sell are 30-year fixed rate mortgages? Think again.

Mortgage lenders give premium commissions periodically for “pushing” a certain type of mortgage loan such as a 15-year mortgage, a 5-year ARM, etc. Think of it as mortgage lenders offering extra income (i.e., an extra 1% of commission or more) to the mortgage brokers for selling specific types of mortgages.

Its advantageous to the mortgage broker to get you to purchase as large of a house as you can afford. The more house you buy, the larger their commission. Also, by selling you certain types of mortgages, they can make extra money. No extra work on their part but the commission could be HUGE.

Therefore, it is important to always be leery of the “advice” they give. I learned this when buying my 1st house many years ago.

Here’s My Experience……..

I was mortgage shopping and trying to figure out how much home I could afford. I took a friend’s advice and figured out how much of a mortgage payment I could afford comfortably (including principal, PMI, taxes, and homeowners’ insurance), and used that as my starting point.

My logic was “How much home could I afford on a 30-year fixed mortgage with a mortgage payment of $XXX a month?” The mortgage brokers I interviewed all gave me some song and dance about how this type of mortgage at this rate could give me WAY more house to fit my budget.

Mow Much Home Can I Buy

I must have interviewed at least 10 mortgage brokers and I received some whacky estimates. All of them said that I could afford a house on a 30-year fixed mortgage worth around $100,000 – $125,000 BUT based on debt-to-income (DTI) ratio, I could actually afford a $180,000+ mortgage! That was about 50% more home (and more payment) than I was comfortable in buying.

Then the “catch” came. This bigger house (the bait) could be affordable if you purchased a 7-year ARM or a 5-year balloon payment or whatever type of mortgage loan they could conceive other than what I asked for (the lure). I’m sure if I said yes, it would really have benefitted their pockets, but I just could not understand why obtaining a 5-year mortgage for a house I planned on living in for at least 10 years or more.

I’m glad I stuck to my guns and purchased the 30-year fixed rate mortgage and at the home price range that I was comfortable in purchasing. A couple of years later, a good friend of mine became a mortgage broker and gave me all the juice on how they operate and the tricks the unscrupulous ones can play. To him, it sounds like they were all looking to bump their commissions up from my wanting a mortgage as a 1st time home buyer. He mentioned that a couple of years ago, he heard from his bosses that the mortgage lenders were pushing certain types of loans and offering generous incentives for doing so.

This is why I urge you to take their advice with a grain of salt. When you find a good one, you’ll find someone who understands your situation and will offer great advice and sound proposals for how to help you get out of a financial rut (if you are in one). If you find the other kind, they may send you down a path you will regret years down the road.

I’m glad my situation worked out and hope you can benefit from this experience. Now back to the purpose of this article: Figuring out how much home you can afford.

4 Factors That Determine How Much House Can Be Afforded

There are 4 key factors mortgage lenders use to determine how much house can be afforded:

  • Monthly Income
  • Cash Reserves
  • Monthly Expenses
  • Credit Profile

Monthly Income

Are you relying on 2 incomes just to get by? Is your job stable? Can you easily find another position with equal or better pay? If meeting your monthly budget depends on every dime you can earn, a pay reduction, no matter how small, can be disastrous.

Monthly income is defined as any money you receive on a regular basis including salary from a job, income from side hustles, and even passive income from investments. Your income helps to establish a baseline for what you can afford every month.

Cash Reserves

This is the amount of money available to make a down payment and cover closing costs. Cash reserves can come from personal savings, investments, even borrowing from your 401K, or a life insurance policy. Though I do not recommend borrowing against your 401K…. another article for another time. 😊

Cash reserves are important because the larger the down payment, the lower the monthly mortgage payment. Putting down at least 20% of the cost of the mortgage allows you to not purchase pre-mortgage insurance (PMI). PMI is required by most lenders if a person puts less than 20% down on a house.

Plus, don’t forget you’ll have several thousands of dollars in closing costs to pay at the time of closing. That is one of the biggest “gotcha’s” that almost did me in. I miscalculated how much money I needed at closing and was too aggressive in trying to buy a house. In hindsight, I should have waited another year before trying to buy a house in order save up a sufficient cash cushion. Fortunately, I had family members rent rooms from me (aka house hacked) that helped to build up my cash reserves.


The flip side to earning income is what the income is used to pay for….. your expenses. Earning a high income (i.e., $100,000 or more) is pointless if you spend $100,000 or more a year. It’s not what you make, it’s what you keep that really matters.

For purposes of calculating how much mortgage you can afford, not all your expenses are used in the debt-to-income calculation (DTI). The amount of debt you have can be a reliable predictor of risk associated with mortgage approval.

To calculate your DTI, your monthly debt obligations are added up and can include:

  • Rent / Mortgage Payments
  • Monthly Alimony / Child Support Payments
  • Student Loan Payments
  • Car Payments
  • Monthly Credit Card Payments
  • Any other debt (i.e., personal loans) you may have

Here is what is NOT included in the DTI calculation:

  • Food Budget (groceries, eating out, etc.)
  • Utility Bills
  • Any Other Variable Bills You Have (i.e. entertainment, vacations, hobbies, etc.)

Credit Profile

Your credit score and the amount of debt you owe has a big influence on the lender’s view of the borrower. As talked about here, the higher the credit score the better the odds of getting the mortgage you want and the better the interest rate you will receive.

Another part of your credit profile that indirectly affects your credit score is your lifestyle. If you do not receive the credit score you need, would you be willing to adjust your lifestyle to try again in the future? How important is getting a house to you?

If fewer nights out and a little tightening of the budget seem palpable to you, there is a good chance you can quickly fix your credit score. However, if you have multiple credit card balances and high student loan debt holding you back, it may be better to focus paying those down more before trying to own a home.

These 4 factors are just a starting point for figuring out how much home you can afford. Next are some rules of thumb I have learned along the way that I used to determine how much home I could afford.

Rules of Thumb To Figure Out How Much House To Buy

The 2X Rule

There is an adage that states to only buy a house that is 2X of your income. For example, if you make $75,000 a year, do not buy a house worth more than $150,000. If feeling risky, definitely do not go past 3X of your salary. Using $75,000 a year as your salary, do not buy a house worth more than $225,000.

How Much Home Can I Buy

Depending on interest rates and the type of loan you get, this is the sweet spot to use to find your home and figure out how much home you can really afford (aka mortgage payment).

No More Than 30% Of Net Income

To understand how much of a mortgage payment you can afford, another rule of thumb is to never have the payment go more than 30% of NET income (after taxes).

A lot of mortgage lenders and online advice say you can go higher, upwards of 36% of GROSS income (before taxes). I warn against this and here is why. If judging payment off your gross income, you end up spending more of your net income than you realize. Net income is what you have after Uncle Sam gets his cut 1st.

Here is an example. Let’s say your gross income is 5,000 a month. If using the 36% of gross rule, your expected “affordable” mortgage payment is $1,800 a month. After taxes are taken out (about 33%), your net income is about $3,350 available to pay the mortgage. You end up spending 55% of your net income to pay for the home the mortgage lender says you can afford!

Can you say TILT?!? Not a good situation to be in.

Now let’s use my net income rule of thumb. Same scenario. You have a $5,000 a month gross income and after taxes you have $3,350 left to pay all your bills. Taking 30% of your net income, the bogey for your new mortgage payment should be about $1,000 a month. This payment should include principal, taxes, PMI, and insurance.

This gives you much more breathing room in your budget and is WAY more realistic. Take it from me, you’ll have unexpected expenses come up with owning a home. Everyone goes through it. It’s easier to build the buffer in now rather than later.

Stick To A 30-Year Fixed Rate Mortgage

To keep life simple, stick to using a 30-year fixed rate mortgage. For 1st time homeowners, it’s the ideal balance between maximizing how much home you can afford and minimizing your mortgage payment.

The reason to stick to a 30-year mortgage is because you have a fixed interest rate and a fixed mortgage payment each month. At first, that mortgage payment will consume a lot of your budget. As time goes by and your career matures, you’ll earn more money and the burden of the mortgage payment on your budget lessens.

If you want to avoid paying all that extra mortgage interest then by all means try a 15-year mortgage. I still recommend when first starting out to use a 30-year mortgage because it provides flexibility. If your life is going well and you want to pay a little extra to the mortgage, you can. The mortgage lender won’t mind additional payments being made.

If money gets tight, you aren’t stuck making the larger mortgage payment. You can add extra money when convenient for you and not when you are forced to.

What To Do Next

Take my rules of thumb and try them out. Play with the numbers and see what home price range you can afford and then compare it to what the mortgage lender or the online calculator thinks you can afford.

If the range of home prices is wide and ranging, you’re not hallucinating. It’s one of the things that frustrates me with how “what you can afford” is sold to you and what really happens. By the time you realize the mistakes being made it’s too late and you’re stuck in a house you really cannot afford.

Take my experiences and lessons learned to heart. Don’t look to buy a home no more than 2-3X of your income. Then take 30% of you monthly net income as the ceiling for the mortgage payment (NOT the floor). Make sure the mortgage lender includes PMI, taxes, and insurance in the final price (they like to “forget” to include that in the final numbers).

Buying a house is a huge undertaking and is exciting! However, it’s crucial to be realistic about what you can afford especially when receiving misleading information from the “experts” you are working with who are supposed to have your best interests at heart. CYA never hurts especially when that is all the backup you have…. food for thought.

So what do you think? I’d love to hear your comment here.

Live The Life You Love, Want, And Deserve!