How Much House Can You Afford?

from daveramsey.com on 03 Aug 2009

"How much house can I afford?" Have you ever asked yourself that question and are still wondering the answer? Well, I have the answer for you.

There is no magic dollar amount that you should be looking for regarding the "perfect home". How much house you can afford is as unique as you are; it's based on many factors, including your location, income, savings, personal preferences, and most importantly, the house-buying plan you have in place.

The most ideal way to buy a house is the 100%-down plan. Sounds weird, doesn't it?! But think how much fun that would be! Don't borrow money. Period. If I can't get you to postpone the purchase that long, I strongly suggest you save a down payment of 20% or more, choose a 15-year (or less) fixed-rate mortgage, and limit your monthly payment to 25% or less of your monthly take-home pay.

You want your new home to be a blessing, not a curse. If you buy a house with nothing down and a huge monthly payment, you're inviting Murphy to move into the spare bedroom. You do not want Murphy as a housemate - believe me! Slow down and realistically think through everything before you jump head-first into making this major purchase. If you don't, you'll just be giving Murphy an open invitation to overtake the house.

Here's a quick checklist of important questions to review as you consider how much house you can afford. If you cannot answer "yes" to these questions regarding the house you have your eye on, then it's not a wise move to buy it right now.

Can I make at least a 10% (preferably a 20%) down payment?
Can I keep house payments at or below 25% of my monthly take-home pay? Here's a calculator to help you quickly calculate your payment.
Can I afford to take out a 15-year fixed-rate loan?
Am I working closely with a real estate agent I can trust?

As a free service for my listeners, we can put you in touch with a real estate agent in your neighborhood that I recommend. These agents follow my teachings and will ensure you get a great house that you can afford! Get connected now.

Happy house-hunting!

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Recently using a referral from Churchill Mortgage (Churchill is not available in Texas) I refinanced my 30 year FHA Fixed rate mortgage (with 24 years left) down to a 15 year VA fixed rate mortgage. Lowered my interest rate by 2%, dropped mortgage insurance, and will save over $175,000 over the course of my loan! All this for an increase of $150 a month on my mortgage payment ... and within Dave's suggest budget percentages! The way my wife and I see it we now will have at least $175,000 more to apply to our retirement now!
Chuck March 12 2010 11:40 AM

I like Dave Ramsey's advice and it has come at a great time for us. We are the exception that he talks about. It would be cheaper for us to buy than rent. We have made mistakes we haven't fixed yet, but we would free up more money by buying. I have a relative who can give us a bigger down payment so that we can qualify for a mortgage in spite of our past mistakes. We have decided to aim for a house that will be according to Dave's guidelines and that will free up money to get debt free. It has always been frustrating to me that we can pay rent but the bank says we can't pay a mortgage that would be less. I am glad I found Dave again so that I don't make the mistake of overpaying for housing again.
char March 08 2010 6:45 PM

Honestly, I don't know what to do. I'm a single mother, with a good income, living in Northern VA for the 1st time. Housing here is expensive. If I stick to Dave's budget, I can afford a $275,000 undesirable house in an undesirable location. Where I live, a home you could live in for 15 years with 2 kids is roughly $400,000. But renting is so expensive that there's no way to stay in a rental saving more for a down payment?
Julie March 02 2010 7:02 AM

What if you live in a market where these rules are flatly unrealistic? 25% of monthly take-home for a couple pulling 160k+ in DC (also NY, etc) gets you, maybe a 1 bedroom apartment. And that's if you put around 100k down, which is likewise impossible. Is there any room for adjustment in these rules to reflect not needing a car, differences in market, etc? I find it hard to believe that the answer really is "continue throwing money away on rent until you're 40 and can put 300k+ down so the monthly is low enough to fit this rule."
Brian February 28 2010 3:08 PM

Not a dumb question James. We're looking at getting a 2nd home because we spend about a 25% of the year in another town and don't want to get over our heads. When we est. what the pmt would be, we take the P&I and multiply by 1.4, since the homestead exemption won't apply. The taxes and insurance can add a lot, plus also consider the maintenance and repair costs plus HOA if applicable can add up.
Cheryl February 25 2010 12:53 PM

Does Dave have a Home Bldg 101 info site? Absolute Do's and Dont's with contractors, etc. Step by step - First things first plan. I know his family recently built. We are debt-free!
glendaperkins February 01 2010 10:33 AM

We recently sold our home. Looked but could not find what we want for the money. We have decided to build and will be doing some of the work ourselves ie electric, heat/air, painting, flooring. Have already purchased our land without financing. We have about 42000 left even after paying some things off but still owe car and boat payment totaling approx 15000. Should I pay them off and or continue with debt snowball. Dont want to use up what money we have as plan on the building process in later Spring. What should we do?
Susan January 29 2010 2:14 PM

Ramsey's right on!- If people had been doing this for the last decade, we wouldn't be in this financial meltdown right now. We were "approved" for a $250,000 home, but only spent $130, because we are not dumb. We put more than 20% down to avoid flushing money away on PMI. And our payments (including taxes and insurance) are below 25% of take-home pay...just as Ramsey suggests. We plan on applying lump sums to the principle to save interest. A penny saved is a penny earned. The more interest we save, the more money goes in our pocket when we sell the house, which means more money to buy the next house...hopefully debt free next time. It can be done- especially in this buyer's market. Our home is less than 3 yrs old- we got it for about half of what it cost the original owners just 3 years ago. Take advantage of this market but STAY within Ramsey's budget guidelines. It's wisdom that you won't regret.
Jenifer January 12 2010 12:57 PM

Is it true that you must be at least 3 payments behind in your mortgage to receive help with a modification. I am still in my home after a divorce and cannot truly afford the payments but want to keep the home. Thank you
kathleen January 11 2010 11:31 AM

I live in Northern VA and make about $120K...at 25% rule, my mortage would have to be around $250K..even with 20% down, that is a house around $320,000K with $64K down.
john January 11 2010 7:46 AM

The 25% is including the taxes and insurance. Dave just wrote about it in the 9/7/09 version of "Dave Says!" column.
Invizi December 14 2009 5:36 PM

I think it only refers to P&I since the 2nd bullet point above provides a link to a payment calculator and it says below the calculator. *Our calculation only includes the principal and interest of the payment. Escrow is not included.
Rich December 10 2009 3:48 PM

I would also like to know the answer to James's question.
Eli December 09 2009 8:54 PM

Thanks for asking this, James. I'd like to know the answer to this as well.
Ryan December 09 2009 11:14 AM

Please excuse the stupid question, but does the mortgage payment you refer to being 25% or less of take home pay include taxes and insurance, or is it only the payment on loan? Thanks for all you do.
James December 01 2009 12:24 PM