Here’s A Quick Way To Figure Out How Much House Can You 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 would 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 25% and 36% 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, and any other personal debt you may have.  All of this added together gives you your total debt.  Just a guess, but let’s 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 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 7:  Mortgage + down payment

Now, take the amount you’ve calculated that you can afford to pay for a mortgage, add the amount of cash 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.