Here’s A Quick Way to Figure Out How Much House You Can Afford

The stock answer given to this question is – if you rent and have cash for a down payment, you can purchase a home.  But what if you don’t rent?  Then here’s the simplified version of what a mortgage broker woud do with you.

Step One: (Annual Salary / 12)

What is your gross monthly income from all sources?  If your annual salary is $75,000, divide this by 12 and you’ll see that your monthly income is $6,250.

Step Two: (Monthly salary x percent you want to spend)

Brokers and financial planners will recommend that you spend anywhere between 29% and 45% of your monthly income on household expenses.  We’re going to use 36%.  $6,250 x .36 = $2,250.

Step Three: (Calculate your debt)

Add up your current monthly debt.  This includes things like a car loan, insurance, school loans, credit cards, child support, and any other personal debt you may have.  All of this added together gives you your total debt.  Just a guess, but lets say that these add up to $750 a month.

Step Four: (Amount you want to spend – total debt)

Now, take that total debt and subtract it from the amount that you were willing to spend per month to get to your maximum monthly payment. $2,250 – $750 = $1,500.

Step Five: (Monthly payment x12)

Multiply that house payment by 12 months, and you have $18,000 to spend each year.

Step Six: (Annual payment / interest rate)

Divide this annual amount by the current interest rate (I’m using 10% because it’s a nice round number, and a good average).  So, $18,000/.10 leaves you with $180,000 available for a mortgage!

Step Seven (Mortgage + down payment)

Now, take the amount that you have calculated that you can afford to pay for a mortgage, add the amount of cash that you have on hand to make a down payment, and you get your purchase price!  So, using the current example: The mortgage was $180,000 plus you have $20,000 on hand for a down payment, then you can afford to purchase a home for $200,000.

Now, did that REALLY seem like algebra to you?

Although this is a quick and easy estimate, you should work with a mortgage lender so that you know EXACTLY how much you can afford.