As a rule of thumb, you can typically afford a home priced two to
three times your gross income. If you earn $100,000, you can typically
afford a home between $200,000 and $300,000.
To understand how that rule applies to your particular financial situation, prepare a family budget and list all the costs of homeownership, like property taxes, insurance, maintenance, utilities, and community association fees, if applicable, as well as costs specific to your family, such as day care costs.
How much money do you have for a downpayment? The higher your downpayment, the lower your monthly payments will be. If you put down at least 20% of the home's cost, you may not have to get private mortgage insurance, which costs hundreds each month. That leaves more money for your mortgage payment.
The lower your downpayment, the higher the loan amount youâ€™ll need to qualify for andÂ the higher your monthly mortgage payment.
Lenders generally follow the 28/41 rule. Your monthly mortgage
payments covering your home loan principal, interest, taxes, and
insurance shouldnâ€™t total more than 28% of your gross annual income.
Your overall monthly payments for your mortgage plus all your other
bills, like car loans, utilities,Â and credit cards, shouldnâ€™t exceed 41%
of your gross annual income.
Hereâ€™s how that works. If your gross annual income is $100,000, multiply by 28% and then divide by 12 months to arrive at a monthly mortgage payment of $2,333 or less. Next, check the total of all your monthly bills including your potential mortgage and make sure they donâ€™t top 41%, or $3,416 in our example.
The tax benefits of homeownership generally allow you to afford a
mortgage paymentâ€”including taxes and insuranceâ€”of about one-third more
than your current rent payment without changing your lifestyle.Â So you
can multiply your current rent by 1.33 to arrive at a rough estimate of a
Hereâ€™s an example. If you currently pay $1,500 per month in rent, you should be able to comfortably afford a $2,000 monthly mortgage payment after factoring in the tax benefits of homeownership.
However, if youâ€™re struggling to keep up with your rent, consider what amount would be comfortable and use that for the calcuation instead.
Also consider whether or not youâ€™ll itemize your deductions. If you take the standard deduction, you canâ€™t also deduct mortgage interest payments. Talking to a tax adviser, or using a tax software program to do a â€œwhat ifâ€ tax return, can help you see your tax situation more clearly.
More on the mortgage interest deduction
More on the tax advantages of homeownership