How Much House Can You Really Afford?

While 35% seems like a straightforward figure, your financial picture is a lot more complicated than that number would make things seem. Your ideal monthly housing costs could vary depending on things such as debt and other monthly payment obligations — not to mention how much you’ve saved for a down payment.

If you have high credit scores and a clean financial background, a mortgage calculator can be a great starting point for mortgage shopping. You’ll get a much better sense of what your price range might be instead of a blanket rule of thumb. But they’re only as accurate as the information you provide, so if you forget to add regular budget line items such as food, day care, or gas costs, you won’t get a complete picture.

Lenders are now legally required to ensure borrowers can “reasonably afford” to repay a loan before they approve a new mortgage. But there’s a difference between being able to reasonably afford something and being able to realistically afford something.

When looking at what’s reasonable, lenders account for your income and any current debts that you need to repay each month. If you make $5,000 per month after taxes and need to pay $500 toward your car loan each month, a mortgage payment of $1,500 may seem perfectly reasonable.

In this (extremely simplified) example, you’d have about $3,000 per month left over to handle all your other expenses. And perhaps you can afford your living expenses on this budget.

But what about the other goals you want to achieve? What about saving for retirement or investing for your future?

If you commit to a large monthly mortgage payment, you may find yourself squeezed to make your remaining money cover your living expenses, plus monthly bills and loan repayments. While a lender can give you a mortgage you can reasonably afford, it could mean not being able to handle other financial priorities.

Only you can examine your life and values to determine what you are willing to spend on your mortgage budget — and what you’re not.

You might be perfectly happy to take on a larger monthly mortgage payment in exchange for reducing meals out, cutting back on vacations, or sticking with your old phone instead of going for the upgrades just because you can. Or you may decide that renting makes more sense for you because you can mitigate costs, take on less financial responsibility, and enjoy more flexibility, so looking for houses for rent might be the number one priority for you now.

Either way, you need to determine what you feel comfortable with. You need to decide what works within both your budget and your long-term plans to reach goals that matter to you.

Once you set your financial priorities, here’s where you’ll need to do the math:

• What’s my current income? What are my basic living expenses? What are my fixed costs?
• How much do I want to put away each month into savings or investments?
• How much will it cost to maintain my new home?
• What kind of down payment do I have? (The more you put down, the smaller your monthly mortgage payment will be.)

Now you can factor a mortgage into all of the above, and see how much you can really afford. When doing so, don’t forget to count both the mortgage principal and interest — along with property taxes, homeowners’ insurance, and other extras such as HOA fees.