Three Tips for Deciding How Much House You Can Afford

Buying a new home is a big financial step for most individuals. While many homes are chosen for purely emotional reasons, there are some initial steps that can prevent major roadblocks later on. The most important first step is determining exactly how much house you can afford.

Gross Income Calculation

One of the most basic ways to determine how much house you can afford is by doubling your gross income. Some mortgage lenders even allow you to triple your income. For example, if your current income before taxes is $50,000, aim for a home price of no more than $150,000. Keep in mind, that this figure is the actual mortgage amount that you will take out. Depending on how large a down payment you have, you could actually afford a higher priced home.

Stick to the 28 Percent Debt Rule

Many lenders and financial advisors suggest that home buyers use a formula where the monthly mortgage payment is no more than 28 percent of their total monthly income. This number includes the actual mortgage payment, interest and insurance costs. To calculate your upper price range, take your net monthly income and multiple it by .28. This number is the highest priced home that you can afford and still stay below 28 percent.

Another important calculation adds up all of your other debt payments such as credit cards, student loans, car payments and others. Add the total of all of your debt to the monthly mortgage payment of the new home. The amount should be no more than 41 percent of your monthly income.

Use Your Current Rent Payment as a Gauge

If you are currently renting, there is another calculation that can help determine a home price range. In general, you can afford to pay a monthly mortgage that is a third more than what you currently pay in rent. Thus, if you multiply your current rent payment by .33, you will arrive at your ideal monthly mortgage payment. This example may underestimate your ideal home price if your rent is low and you have a significant amount of money left over each month.

As you can see, there are various ways to accurately determine the ideal home purchase price for a buyer. Places like UnitedMilitaryMortgage.com have a staff of trained professionals who can assist buyers in determining whether they qualify for VA home loans as well as see what you can afford.