How much house can you actually afford? It's the first question every buyer asks, and honestly, there's more than one way to answer it.

You can either budget it out or let a percentage rule do it for you. I'd recommend budgeting it out.

Method 1: Budgeting It Out

This is the more accurate way to do it. Take your income, subtract out your needs, your lifestyle spending, and your savings goals. Whatever is left over is what you can afford for a mortgage payment.

It takes a little more work than a quick formula, but it gives you a real number based on your actual life, not just a rule of thumb.

Method 2: The Percentage Rule

If you'd rather use a rule based on a percentage of your income, there are two ways people look at it:

  • Gross income
  • Net income

Gross income is the money before taxes and other pretax contributions come out. So a $120k salary on your offer letter works out to $10k in monthly income.

Net income is the money that actually hits your bank account.

What Lenders Actually Allow

Lenders, for example on conventional loans, have a max total debt to income ratio of 49.99%.

That means if there's no other debt showing on your credit report, someone making a $120k salary would get approved for a $4,999.00 housing payment.

That's the max the lender allows though, not necessarily what you should spend. That's where budgeting it out (method 1) comes back in.

Which Method Should You Use?

The percentage rule is quick and gives you a ballpark. Budgeting it out is slower but tells you what you can actually afford based on your real expenses and goals.

My advice: use the percentage rule to get a rough idea, then budget it out to find your real number.

If you want to run your own numbers and see an estimated purchase price based on your income, check out our affordability calculator.

And if you want to walk through your specific numbers with someone instead of guessing, grab a free planning session with me.

Hope this helps!

Sam

How Much House Can You Afford? 2 Simple Ways to Find Out
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Originally shared by u/SamTMortgageBroker in r/NewbHomebuyer — view the original thread.